report • january – june 2016...tion. employment growth accelerated to 1.2 per cent on an annual...

RepoRt • January – June 2016

Bulgarian National Bank

Published by the Bulgarian National Bank1, Knyaz Alexander I Square, 1000 SofiaTel.: (+359 2) 9145 1351, 9145 1209, 9145 1231Fax: (+359 2) 980 2425, 980 6493Printed in the BNB Printing Centre

Website: www.bnb.bg

© Bulgarian National Bank, 2016

The BNB January–June 2016 Report employs data published prior to 30 September 2016.

Materials and information in the Report may be quoted or reproduced without further permission. Due acknowledgment is requested.

ISSN 1313-3454 (print)ISSN 2367-4946 (online)

Honourable Chair of the National Assembly,

Honourable People’s Representatives,

Under the provisions of Article 1, paragraph 2 and Article 50 of the

Law on the Bulgarian National Bank, I have the honour of presenting

the January–June 2016 Report.

Dimitar Radev

Governor

of the Bulgarian National Bank

BN

B G

over

ning

Cou

ncil

Sitting from left to right: Boryana Pencheva, Nina Stoyanova, Lena Roussenova, Elitsa Nikolova.Standing from left to right: Dimitar Kostov, Dimitar Radev, Kalin Hristov.

Governing Council

Dimitar RadevGovernor

Kalin HristovDeputy GovernorIssue Department

Nina StoyanovaDeputy GovernorBanking Department

Dimitar KostovDeputy GovernorBanking Supervision Department

Boryana Pencheva

Lena Roussenova

Elitsa Nikolova

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7

Bulg

arian National B

ank. Rep

ort • January – June 2016

Contents

Summary _________________________________________________________ 9

I. Economic Development in the First Half of 2016 ____________________ 13

1. The External Environment _____________________________________ 13

2. The Bulgarian Economy _______________________________________ 16

II. Gross International Reserves ____________________________________ 27

1. The Amount and Structure of Gross International Reserves _____________ 28

2. Gross International Reserve Risk and Return ________________________ 29

III. Payment Systems _____________________________________________ 36

1. Lev Payment Systems __________________________________________ 36

2. Euro Payment Systems _________________________________________ 38

3. Bulgarian Payment and Settlement System Development _______________ 39

4. Payment Oversight, Licensing, and Entries __________________________ 40

IV. Banks’ Reserves at the BNB ____________________________________ 41

V. Currency in Circulation _________________________________________ 43

VI. Maintaining Banking Stability and Protecting Depositor Interests _________ 46

1. State of the Banking System ____________________________________ 46

2. Financial Institutions Registered under Law on Credit Institutions Article 3a _________________________________________ 53

3. Banking Supervision ___________________________________________ 53

VII. BNB Activity on Resolution of Credit Institutions _____________________ 59

VIII. The Central Credit Register _____________________________________ 60

IX. The Fiscal Agent and State Depository Function _____________________ 62

X. Participating in the ESCB and EU Bodies ___________________________ 67

XI. International Relations _________________________________________ 70

XII. Statistics ____________________________________________________ 71

XIII. Research ____________________________________________________ 73

XIV. Human Resource Management __________________________________ 74

XV. BNB Internal Audit ____________________________________________ 76

XVI. BNB Budget Implementation in the First Half of 2016 _________________ 77

1. Operating Expenditure _________________________________________ 77

2. Investment Programme ________________________________________ 78

XVII. Bulgarian National Bank Consolidated Financial Statements ___________ 81

Major Resolutions of the BNB Governing Council between 1 January and 30 June 2016 __________________________________ 119

Appendix (CD)

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Abbreviations

ABSPP ECB Asset-backed Securities Purchase Programme APP ECB Asset Purchase ProgrammeAQR asset quality review

AS ROAD Automated System for Registration and Servicing of External DebtATM Automated Teller MachineBIS Bank for International Settlements

BISERA Bank Integrated System for Electronic PaymentsBNB Bulgarian National Bank

BOP balance of paymentsBORICA Bank Organisation for Payments Initiated by Cards

BRF Bank Resolution FundCBPP3 ECB’s Third Covered Bond Purchase Programme

CCR Central Credit RegisterCHF Swiss franc

CNY Chinese yuanEBA European Banking Authority

EC European CommissionECB European Central Bank

Ecofin Economic and Financial Affairs Council of the European Union comprising Member State economics and finance ministers

EDIS European Deposit Insurance SchemeEONIA Euro OverNight Index Average (registered trademark of the European Money Market Institute, EMMI)

ESA 2010 European System of National and Regional AccountsESCB European System of Central BanksESRB European Systemic Risk Board

ESROT Electronic System for Registering and Servicing Government Securities TradingEU European Union

EUR euroEURIBOR Euro InterBank Offered Rate (EURIBOR, registered trademark of the European Money Market Institute, EMMI)

GDP Gross Domestic ProductGSAS System for Government Securities Sale and Repurchase AuctionsHICP Harmonized Index of Consumer Prices

IAS International Accounting StandardsIASB International Accounting Standards BoardIFRS International Financial Reporting Standards

IMF International Monetary FundIOBFR System for Budget and Fiscal Reserve Information Servicing

KTB Corporate Commercial Bank ADLBDG Law on Bank Deposit GuaranteeLBNB Law on the BNB

LCI Law on Credit InstitutionsLEONIA an interest rate on real transactions in unsecured overnight deposits in BGN offered at the interbank marketLPSPS Law on Payment Services and Payment Systems

LRRCIIF Law on the Recovery and Resolution of Credit Institutions and Investment FirmsLTROs Longer-term refinancing operations

MF Ministry of FinanceMFI Monetary Financial Institutions

NPISH Non-profit institutions serving householdsNSI National Statistical Institute

OPEC Organization of Petroleum Exporting CountriesPOS Point of sale/point of service: a retail trade terminal for credit and debit card transactions

PSPP Public Sector Purchase Programme RINGS Real time gross settlement system

ROA Return on AssetsROE Return on EquitySDR special drawing rights

SEPA Single Euro Payments Area SITC Standard International Trade Classification

SOFIBID (Sofia Interbank Bid Rate) is an index calculated as the average of the bid quotes for unsecured BGN depositsSOFIBOR (Sofia Interbank Offered Rate) is a fixing of the quotes for unsecured BGN deposits offered in the Bulgarian interbank marketTARGET2 Trans-European Automated Real-time Gross Settlement Express Transfer System for the Euro

TARGET2-BNB Bulgarian system component of TARGET 2USD US dollarVaR Value-at-RiskVAT value added taxWB World Bank

XAU troy ounce goldXDR currency code for special drawing rights

ZUNK Law on Settlement of Non-performing Credits Negotiated prior to 31 December 1990

9

Sum

mary

Summary

In the first half of 2016 the world economy’s annual growth rate slowed down on the same period of the previous year (mainly due to lower US growth), while world trade volumes hardly increased. The downward trend in the prices of crude oil, food, and most commodities on international markets continued. As a result, in June 2016 global inflation was lower than at the end of 2015.

International financial market developments mainly reflected market participants’ ex-pectations of ECB and Federal Reserve monetary policy. Persistently low inflation prospects for the euro area prompted the ECB to cut main refinancing operations and marginal lending facility interest by 5 basis points each to 0.0 and 0.25 per cent, along with reducing the deposit facility rate by 10 basis points to -0.40 per cent, and broadening non-standard monetary policy measures. As a result, in the first half-year euro area money market interest rates and the yield on debt securities fell. The Fed-eral Reserve System kept the target range for the federal funds rate unchanged at 0.25 to 0.50 per cent and continued reinvesting the proceeds of maturing US govern-ment securities and mortgage bonds on its balance sheet in analogous instruments due to low inflation in the first half-year. At the end of June international financial mar-ket volatility increased significantly, largely due to the outcome of the 23 June 2016 referendum on United Kingdom membership of the European Union (EU), which was in favour of leaving the EU.

Despite the global economic growth slowdown, in the first half of 2016 real growth in Bulgaria was 3 per cent on an annual basis. By component, private consumption had the highest positive contribution to growth followed by the change in inventories and net exports. The increase in consumption was due to improved labour market situa-tion. Employment growth accelerated to 1.2 per cent on an annual basis, the rate of unemployment slowing to 8.3 per cent in the first half-year. Average nominal wage rose significantly in the first half-year across all economic sectors. Labour productiv-ity in total economy increased by 1.7 per cent year-on-year in the first half of 2016.

The decline in crude oil, food, and commodities prices on international markets con-tributed significantly to consumer price deflation in Bulgaria. By the end of June the harmonised consumer price index fell 1.9 per cent on an annual basis.

Non-government sector deposits in the banking system continued to grow relatively fast, with households retaining their high savings rate and leading deposit growth. In the first half of 2016 the rate of decline of claims on non-financial corporations and households started to moderate on an annual basis. Factors exerting a dampening effect on credit dynamics related mainly to the still weak demand and the ongoing process of bank portfolio optimisation and their prudent lending policy.

In the first half of 2016 the consolidated fiscal programme cash surplus was BGN 3070.7 million: up BGN 2181.2 million on the same period of the previous year corresponding period of 2015 resulting from better tax and non-tax revenue and a significant capital expenditure reduction. By the end of June, the total fiscal reserve, including certified expenditure claims on EU funds, advance, and other payments, was BGN 14,131.5 million, of which BGN 12,628.4 million on deposits.

In conducting its policy, the Bulgarian National Bank (BNB) takes into account the in-ternational situation and developments in the domestic economy. The BNB pursues its primary objective of price stability through maintaining the stability of the national

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currency by applying the Law on the Bulgarian National Bank, its potential, and ca-pabilities effectively.

The BNB manages gross international reserves to ensure high security and liquidity. The main portion of international reserves continued to be invested into government securities and government guaranteed debt of the euro area core, and into short-term deposits with first class foreign banks. By the end of the first half of 2016 some 65 per cent of international reserves was invested into assets with the highest AAA long term credit rating.

By the end of June 2016 the market value of gross international reserves was EUR 22,442 million: up EUR 2157 million on the end of 2015. In the first half-year net income from international reserves management was EUR 396.35 or 2.06 per cent of total return for the review period. By component, net income comprised: income from investment of gross international reserves in the original currency (EUR 115.66 million), income from currency imbalance (EUR 275.86 million) almost entirely due to the change in the price of monetary gold in euro, and net financial result in liabilities, which was positive (EUR 4.83 million) as a result of the new interest rate policy intro-duced in early January 2016 with regard to banks excess reserves with the BNB and the negative market rates charged to other customers’ balance sheets.

The Bank regulates and supervises banks in Bulgaria to maintain banking system sta-bility and protect depositors’ interests. In the first half of the year the BNB conducted asset quality review (AQR) of all 22 banks licensed by it, excluding six foreign bank branches operating in Bulgaria. The AQR was in collaboration with an independent external consultant selected by public tender, and independent consultants and ap-praisers employed by the banks after a uniform selection procedure approved by the BNB. More than 900 experts across the BNB and the external independent parties were involved in the AQR. The European Commission (EC) and the European Banking Authority (EBA) were regularly informed and asked for opinions at all stages.

The AQR addressed assets worth BGN 84.2 billion on 31 December 2015: 96 per cent of banking system assets. Over 3400 individual credit files were reviewed, comprising BGN 23.2 billion or 71 per cent of banks’ corporate and large SMEs loan books. The AQR resulted in aggregate adjustments of BGN 665 million, or 1.3 per cent of risk-weighted assets, to be reflected in the banks’ 2016 financial statements. The AQR-ad-justed common equity tier one capital ratio for the banking system was 18.9 per cent on 31 December 2015. Though individual bank results vary, after the AQR the capital adequacy of all banks remained above regulatory minima. Therefore, expected capi-tal adjustments at individual banks affect only capital buffers above regulatory capital adequacy minima. The corresponding follow-up measures aim to maintain buffers or restore them.

A stress test (ST) of 22 banks was conducted in July 2016 to assess each individual bank’s resilience against shocks from hypothetical negative financial and macroeco-nomic developments. The ST results confirm the strong capital position and resilience to tested potential shocks, though individual bank results vary. On 13 August 2016 the BNB published the results of the AQR and ST.

Alongside the AQR and ST, banking supervision conducted regular supervision and helped draft laws on banking. Off-site supervision conducted regular assessments of possible or actual risks to credit institutions. Work continued on improving super-visory performance to provide the information necessary for adequate assessments of banks’ risk profiles. Factors influencing banking system stability continued to be monitored in line with the macroprudential supervision commitments. Five stand-alone inspections at credit institutions aimed to examine their money laundering risk meas-

11

Sum

mary

urement procedures and control mechanisms, administrative capacity, and organisa-tional culture.

The banking system was stable, increased its balance sheet assets and deposits, and its liquidity and capital position. System profitability also improved. Banking earn-ings for the first half-year came to BGN 773 million or BGN 270 million more than by June 2015. Return on assets (ROA) and equity (ROE) stood at 1.74 and 13.11 per cent. Banks moved to optimise their balance sheets, particularly as regards credit risk assessment. This involved selling loans, derecognition at the expense of provisions, and swapping debt for equity using pledged security.

A new Ordinance No 21 on minimum reserve requirements came into force on 4 Janu-ary 2016. Under it the Bank applies the ECB deposit facility rate on banks’ excess reserves where it is negative. Zero interest applies to excess reserves where the ECB deposit facility interest rate is positive or zero. Responding to these changes, in January banks cut minimum reserve requirements accounts excess to 103.1 per cent from 127.8 per cent in December 2015. February saw an increase in the excess to 108.1 per cent, followed by a gradual fall to 86.7 per cent in June. The application of ECB deposit facility negative interest to excess reserves accelerated ECB monetary policy transmission to Bulgarian interbank money market rates, cutting interest across all maturity sectors traded between banks quite significantly in the first half-year.

The Law on the Recovery and Resolution of Credit Institutions and Investment Firms in force from 14 August 2015 makes the BNB Governing Council responsible for bank resolution. In discharging this duty, in the first half of 2016 the Bank focused on estab-lishing an information system on the collection, review and assessment of the quality of information used to determine critical functions and prepare bank resolution plans. Under the same Law the BNB set the annual banking system contribution to the BRF for 2016 at BGN 95,687,000 and apportioned it among banks to an approved meth-odology; all banks paid their contributions within 30 days of the decision.

Implementing, operating, and overseeing efficient payment systems is an important central bank duty. In the first half of 2016 national payment systems continued to function effectively and to ensure payment flow continuity. RINGS, a real-time gross settlement system operated by the BNB, processed 86 per cent of payments in Bul-garia. The national system component of the Trans-European Automated Real-time Gross settlement Express Transfer system for the euro (TARGET2) run by the BNB (TARGET2-BNB) processed 108,421 payments for EUR 178,070 million. In the first six months the Bank inspected two payment service providers and two institutions to establish whether they had offered payment services without due licence. The BNB granted one electronic money institution and one payment institution licence. The Bank declined one electronic money institution licence.

BNB issue and cash operations include banknote printing, coin minting; accept-ing, delivering, repaying, processing, authenticity and fitness checking of Bulgarian and foreign cash; exchanging damaged Bulgarian cash; and destroying unfit Bul-garian cash. In late June 2016, 395.8 million banknotes worth BGN 12,389.0 million were in circulation: a 5.42 per cent annual increase. Coins circulation rose 8.9 per cent to 2001.1 million. The share of retained non-genuine Bulgarian banknotes was 0.000153 per cent of circulating banknotes, while that of retained non-genuine Bul-garian coins in circulating coins was 0.000023 per cent. To discharge its control du-ties in cash circulation integrity and security, in the first half of 2016 the BNB per-formed three full checks into credit institution and service provider regulatory compli-ance in circulating cash quality control.

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Under contracts negotiated to market conditions and prices, the Bank compiles, pro-cesses, keeps and submits on a regular basis to the Ministry of Finance, statements on budget entities and municipalities’ accounts with banks in Bulgaria and acts as government debt agent servicing government bond trade. The total nominal volume of Electronic System for Registering and Servicing Government Securities Trading (ESROT) registered government securities transactions was BGN 8769.5 million, down 31.7 per cent on the corresponding period of 2015.

By participating in the committees and working groups of the European System of Central Banks (ESCB), the European Commission, the EU Council, the European Sys-temic Risk Board, the European Banking Authority, and the Council for European Af-fairs, the BNB contributed to formulating Bulgarian standpoints on key economic gov-ernance areas and the financial sector.

13

Econom

ic Develop

ment in the First H

alf of 2016

1. The External Environment

In the first half of 2016 the annual growth rate in the world economy was 2.2 per cent, down on the first half of 2015 (2.7 per cent).1 Slower US growth contributed greatly to this. Developing countries and emerging economies grew slightly faster on an annual basis despite a continuing slowdown in Chinese growth and deepening Brazilian re-cession. The United Kingdom referendum on European Union membership on 23 June increased uncertainty, leading to significant financial market fluctuations at the end of the half-year.2

Global industrial output picked up 1.2 per cent3 on an annual basis on 1.5 per cent in the same period of 2015. It declined annually in Japan, the USA, and Latin America. Euro area industrial output continued to rise on an annual basis at rates close to those in the first half of 2015. World trade expanded 0.2 per cent,4 a significant growth mod-eration from the 2.3 per cent a year ago. The annual growth rate of foreign trade in the euro area and Japan decreased, as did trading volumes in emerging economies and the USA.

Major Macroeconomic Indicators (averages for the period) (per cent)

Real GdP Growth Rate Inflation unemployment Rate

2014 20152016

2014 20152016

2014 20152016

I II I II I II

EU 1.5 2.2 1.7 2.0 -0.1 0.2 0.0 0.1 10.2 9.4 9.2 8.6

Euro area 1.1. 2.0 1.6 2.2 -0.2 0.2 0.0 0.1 11.7 10.9 10.7 10.0

New EU Member States 2.9 3.6 2.6 3.5 -0.4 -0.3 -0.8 -0.5 8.4 7.0 6.5 5.8

EU-3 2.8 2.4 1.7 1.1. 0.5 0.3 0.5 0.6 6.4 5.7 5.4 5.2

United States 2.4 2.6 1.6 1.3 0.8 0.7 0.9 1.0 6.2 5.3 5.2 4.8

Japan 0.0 0.5 0.2 0.8 2.4 0.2 0.0 -0.4 3.6 3.4 3.2. 3.2.

China 7.2 6.8 6.7 6.7 1.5 1.6 2.3 1.9 4.1 4.1 4.0 4.1

Note: The EU includes all 28 Member States. New EU Member States are countries joining since 2004 less those now in the euro area. The ЕU-3 are the United Kingdom, Sweden, and Denmark. New EU Member States and ЕU-3 indicators are calculated by weighing time series by country weights in group GDP for growth, in group labour force for unemployment, and the weights of the EU-28 in HICP calculated by Eurostat for inflation. Real GDP growth calculated on an annual basis according to non-seasonally adjusted data. Quarterly unemployment data are non-seasonally adjusted.

Sources: Eurostat, Bureau of Economic Analysis, Bureau of Labor Statistics, Statistics Bureau of Japan, the National Bu-reau of Statistics of China, BNB computations.

A gradual recovery of economic activity in the euro area continued in the first half of 2016, underpinned by ECB monetary policy measures. Private consumption, and to a lesser extent fixed capital investment contributed most to real GDP growth5 on an an-nual basis in both the first and second quarters. Luxembourg,6 Malta, and Ireland re-ported the highest economic growth, unlike Greece where real GDP contracted on an annual basis for the fourth consecutive quarter. Unemployment fell to 10.4 per cent on

1 Seasonally adjusted World Bank quarterly data as of 26 September 2016.2 The BNB Economic Review quarterly publishes detailed information and analyses on international commodity and

financial market developments, major euro area, US, and China macroeconomic indicators, and ECB and Federal Reserve System monetary policies.

3 Based on CPB data: Netherlands Bureau for Economic Policy Analysis, 21 September 2016.4 Ibid.5 Non-seasonally adjusted.6 Data for the second quarter of 2016 are missing.

I. Economic Development in the First Half of 2016

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average (11.3 per cent in June 2015), with Greece (24.0 per cent) and Spain (20.5 per cent) still recording the highest values. Germany remained the country with lowest un-employment (4.4 per cent), followed by Malta (4.5 per cent). US real economic activity growth slowed down in the first half-year, reflecting the lower year-on-year positive contribution of private consumption and the negative contribution of private investment. Private consumption was still the main driver to economic growth, unemployment continuing its downward trend to reach 5.0 per cent for the half-year from 5.6 per cent in the same period of 2015. Global inflation was 1.2 per cent7 from 1.5 per cent at the end of 2015, declining in de-veloping economies and increasing slightly in developed economies.8 In June 2016 annual euro area inflation9 fell to 0.1 per cent from 0.2 per cent in Decem-ber 2015, with core inflation (excluding food, energy, alcohol, and tobacco) remaining at 0.9 per cent. Belgium and Malta led annual inflation at 1.8 and 1.0 per cent, while Cyprus and Spain trailed at -2.0 and -0.9 per cent. US inflation10 was 1.0 per cent on an annual basis, an increase on the 0.7 per cent at end of 2015. Inflation measured by the private consumption expenditure deflator accel-erated on an annual basis to 0.9 per cent on an annual basis from 0.4 per cent in the second half of 2015.

The downward trend in most commodity group and raw material prices in international markets continued over the period, Brent crude oil price falling on an annual basis in both US dollars11 (30.8 per cent) and euro (31.0 per cent). Petrol price dynamics con-tinued to reflect increased production and supply, with signs of global supply and de-mand rebalancing reported in the first half-year, leading to Brent price rises on a quar-terly basis. In the first six months food prices declined by 7.1 per cent annually in both dollars and euro. Cereal prices posted a decline (7.6 per cent in euro) due to good har-vests and high inventories. The metals euro price index decreased on an annual basis by 16.5 per cent reflecting mainly lower demand by Chinese industry and high supply and inventories. Copper prices in euro declined by 20.9 per cent.

Federal Reserve System and ECB Interest Rates(per cent)

Sources: the ECB, the Federal Reserve System.

7 Based on World Bank’s seasonally adjusted data as of 26 September 2016.8 Ibid.9 Measured by the Harmonised Index of Consumer Prices (HICP).10 Measured by the Consumer Price Index (CPI).11 Referred to as the US dollar below.

15

Econom

ic Develop

ment in the First H

alf of 2016Differences between ECB and US Federal Reserve monetary policies deepened fur-ther.12 With persistently low inflation prospects for the euro area, in March the ECB ini-tiated additional standard and non-standard monetary policy measures. Interest rates on main refinancing operations decreased 5 basis points to nil per cent, on the mar-ginal lending facility 5 basis points to 0.25 per cent, and on the deposit facility 10 ba-sis points to -0.40 per cent. From April the volume of monthly purchases under the expanded asset purchase programme rose to EUR 80 billion. A new corporate sector purchase programme for investment grade bonds issued by euro area non-bank cor-porations was launched in June 2016.

The US Federal Reserve System made no changes to its interest rate policy over the first half-year after commencing monetary policy normalisation by increasing the fed-eral funds rate in December 2015. Low US inflation and intensification of external risks, including the uncertainty surrounding the UK referendum were the main factors for leav-ing the federal funds rate target range unchanged by end-June.

After January and February falls, the EURO STOXX 50 and STOXX EU ENLARGED rose in March and April in anticipation of additional ECB monetary policy measures. In June the indices fell again due to the uncertainty about the UK referendum. US Dow Jones and NASDAQ indices fell temporarily in the first two months, followed by a recovery and relative stabilisation until June when the UK referendum results pushed them down.13

Main Stock Exchange Indices in the First Half of 2016

Note: US dollars, December 2015 = 100.

12 For details on ECB and US Federal Reserve monetary policies, see Chapter II.13 For more information on government bond markets, see Chapter II.

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2. The Bulgarian Economy

In the first six months of 2016 Bulgaria’s GDP posted real growth of 3.0 per cent14 on an annual basis.15 Economic activity retained its growth rate from the correspond-ing period of 2015, but with changed individual component contributions. Private con-sumption (1.5 percentage points) contributed most, while government consumption fell 3.3 per cent, contributing negatively to real growth. Reflecting a stronger goods and services export rise compared to imports, net exports made a positive, though signifi-cantly lower, contribution to real GDP growth than in the same period of 2015. Fixed capital investment picked up on an annual basis, underpinned strongly by private in-vestment. Concurrently, higher inventories, mainly in construction and trade, repair of motor vehicles and motorcycles, made an essential positive contribution of 1.3 percent-age points to real GDP growth.

Real GDP Growth Rate and Contribution by Component of Final Use(compared to the corresponding period of previous year, non-seasonally adjusted data)

2015 2016

January – June July – december January – June

Change (per cent)

Contribution, percentage points

Change (per cent)


Change (per cent)


GdP 3.0 - 2.9 - 3.0 -

Final consumption -0.9 -0.8 2.1 1.6 1.1. 0.9

Household consumption -0.8 -0.6 2.2 1.3 2.4 1.5

NPISH consumption -6.3 0.0 3.9 0.0 3.5 0.0

Final consumption expenditure of the general government sector -0.4 0.0 0.8 0.0 -0.1 0.0

Collective consumption -1.8 -0.2 2.6 0.2 -6.6 -0.6

Gross fixed capital formation -1.1 -0.2 5.3 1.1. 0/4). 0.1

Physical changes in inventories - 1.0 - -1.0 - 1.3

Exports (goods and services), net - 3.1 - 1.2 - 0.6

Exports (goods and services) 10.6 6.9 5.2 3.4 4.4 2.9

Imports (goods and services) 5.6 3.8 3.3. 2.2 3.5 2.3

Sources: the NSI, the BNB.

Real GDP Growth Rate and Contribution by Component of Final Use(per cent, percentage points on corresponding quarter of previous year, non-seasonally adjusted data)


14 The analysis employs GDP data published by the NSI on 2 September 2016.15 The BNB Economic Review quarterly publishes further information and analyses on major macroeconomic indicators

in Bulgaria.

17

Econom

ic Develop

ment in the First H

alf of 2016The first half-year employment recovery and further unemployment declines contrib-uted positively to household consumption. Consumer confidence continued improving and final household consumption expenditure posted 2.4 per cent real growth on an annual basis along with continuing high savings rates.

Real terms fixed capital investment rose 0.4 per cent on the same period of 2015. The rise was entirely due to private investment and progressively improving expectations of future economic activity. Government investment fell on an annual basis, however. Slowing government capital expenditure resulted from lower investment into EU funded 2014–2020 Operational Programme projects.

In the first half-year the growth rate of gross value added in the economy increased to 2.8 from 1.8 per cent in the first half of 2015. Services and industry16 contributed most significantly to economic activity acceleration. Gross value added in services went up in all sub-sectors, with trade17 and real estate operations contributing most. Agriculture, forestry and fishing, and construction made low negative contributions to the change in total value added.

Gross Value Added Change in Real Terms and Contribution by Industry(compared to the corresponding period of previous year, non-seasonally adjusted data)

2015 2016

January – June July – december January – June

Change (per cent)

Contribution, percentage

points

Change (per cent)


points

Change (per cent)


points

Gross value added 1.8 - 1.2 - 2.8 -

Agriculture and forestry -0.6 0.0 -1.9 -0.2 -0.3 0.0

Industry* 2.5 0.7 3.1 0.8 1.5 0.4

Services 1.7 1.1. 0.9 0.6 3.6 2.4

* Industry and construction.


Gross Value Added Change in Real Terms and Contribution by Industry(per cent, percentage points on corresponding quarter of previous year, non-seasonally adjusted data)


16 Specifically mining and quarrying; manufacturing; electricity, gas, steam and air conditioning supply; water supply; sewerage, waste management and remediation activities by economic activity groupings (A10).

17 Specifically wholesale and retail trade, repair of motor vehicles and motorcycles; transportation and storage; accom-modation and food service activities by economic activity groupings (A10).

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In the first half-year total employment annual growth rose to 1.2 per cent after grad-ual acceleration in the previous two years. Services (trade, professional activities and scientific research18 and information and communication,19 in particular), followed by industry made the major positive contributions to employment growth. Agriculture, for-estry and fishing, and construction contributed negatively.

Unemployment, estimated by Employment Agency registrations, declined to 9.6 per cent on average from 10.7 per cent in the first half of 2015. NSI Labour Force Survey data show the unemployment rate as defined by the International Labour Organization falling to 8.3 per cent from 10.2 per cent on average in the first half of 2015. Long-term unemployment (over 12 months) fell more, its share dropping to 58.3 per cent of all un-employed from 61.1 a year earlier. The economic activity rate of the 15–64 age group matched the corresponding period of previous year at 68.8 per cent, while the number of discouraged persons in same group fell to 168,000 from 178,000 in the first half of 2015.

Labour productivity for the total economy increased by 1.7 per cent year-on-year from 2.5 in the first half of 2015. Labour productivity growth accelerated on an annual basis in industry, trade, financial and insurance activities and agriculture, forestry and fishing. It declined at a slowing rate only in construction and information and communication. The remaining sectors recorded slowing labour productivity growth.

In line with improving economic activity, measured by value added dynamics, and growing employment recovery in most sectors, average nominal wage in the total econ-omy rose significantly. Minimum wage and minimum insurance threshold increases since early 2016 also affected wage dynamics. Average nominal wage annual growth rate accelerated to 8.0 per cent from 1.1 in the same period of 2015. National accounts data show that wages grew in all sectors, with professional activities and scientific re-search, financial and insurance activities and agriculture, forestry and fishing growing more than average. In the first half-year average real terms wage20 grew faster than nominal wage (9.8 per cent), accelerating significantly from the 2.3 per cent growth in the same period of 2015.

Unit Labour Costs(moving average, 2010 = 100)


18 Specifically, professional, scientific and technical activities; administrative and support service activities by economic activity groupings (A10).

19 Information and communication by economic activity groupings (A10). 20 HICP deflated.

19

Econom

ic Develop

ment in the First H

alf of 2016Wage and labour productivity developments pushed up nominal unit labour costs, their growth rate rising to 6.0 per cent from a 0.9 per cent drop in the first half of 2015. Real terms unit labour costs rose 5.8 per cent on an annual basis from a 3.5 per cent drop in the same period of previous year.

Total economy gross operating surplus fell 4.5 per cent year on year from 7.6 per cent growth in the same period of 2015. Agriculture, forestry and fishing made the main negative contribution to this.

The GDP deflator was positive at 0.2 per cent against 2.7 in the same period of 2015. Positive values were recorded in construction, industry and most services subsectors. GDP deflator breakdown by final consumption expenditure component shows that it grew due to net exports, unlike other components which dropped on an annual basis. Net exports’ positive contribution reflected favourable trading conditions due to the stronger decline in the import deflator over the exports one as a result of the changed structure of goods imports and exports21 and the 2.8 per cent appreciation of the nomi-nal effective exchange rate of the lev against the currencies of Bulgaria’s main trading partners.22

By the end of June inflation23 in Bulgaria was 1.9 per cent from -0.9 per cent in Decem-ber 2015. International crude oil and commodity price falls contributed most to con-sumer price deflation by passing through to fuel, transport service and some adminis-tratively controlled prices. Lower import and domestic prices of some agricultural prod-ucts contributed to food deflation since early 2016. The effect of internal factors driving the long-term downward trend in telecommunication and durable goods prices further intensified the deflationary trend in consumer prices. Higher charges and excise duties contributed positively to inflation,24 the effect partially offset by falls in administratively controlled heating and gas prices indirectly reflecting international oil prices. Higher private sector labour costs exerted no essential upward pressure on consumer prices in the context of cheaper raw materials.

The first six months saw an accelerating trend towards falling core inflation (excluding food, energy products, goods and services with administratively controlled prices, and tobacco products) due to deflation in the services group and continuous downward dy-namics in non-food goods. In June core inflation was -1.7 per cent on an annual basis from -0.3 per cent in December 2015. Decreased telecommunications prices reflecting competition and lower transport prices affected indirectly by fuel prices continued ex-erting downward pressures on services prices. In the first half-year the non-food price index declined further on an annual basis due to continuous long-term downward trend in automobile, computer and communication equipment, and furniture and furnishings prices. Prices in the other sub-groups of durable and non-durable goods dropped slightly or stabilised on an annual basis, contributing to the increase in their negative contributions to overall inflation.

21 Goods export dynamics was largely driven by high value added goods like machines, chemical and other processed products. Goods imports were affected by raw materials.

22 The analysis employs ECB data on the nominal effective exchange rate index of the lev against the currencies of 38 trading partners.

23 The analysis relies on HICP data.24 The minimum overall excise duty (specific and ad-volarem) on tobacco products (up 8.8 per cent) and road tax (up

47.4 per cent) were raised in early 2016. From June 2016 urban public transport fares increased mainly as a result of a 60 per cent rise in Sofia.

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HICP Inflation Accumulated since the Year’s Start and Contributions by Major Goods and Services Groups to It

January–June 2015 January–June 2016

Inflation (per cent) -0.3 -1.3

Rate of inflation by group (per cent)


Rate of inflation by group (per cent)


Food 0.6 0.14 -0.5 -0.11

Processed food 0.6 0.10 -0.1 -0.02

Unprocessed food 0.5 0.05 -1.3 -0.09

Services -1.1 -0.28 -3.2 -0.83

Catering 0.6 0.04 0.7 0.04

Transportation -8.5 -0.31 -9.6 -0.37

Telecommunication -0.2 -0.01 -4.7 -0.25

Other services 0.1 0.01 -2.2 -0.25

energy products 0.1 0.01 -5.7 -0.33

Transport fuels 0.2 0.02 -6.2 -0.32

Industrial goods -0.7 -0.14 -1.3 -0.30

administratively controlled prices -0.5 -0.08 0.6 0.10

tobacco products 0.3 0.01 2.9 0.14

Notes: This structure corresponds to the Eurostat classification; tobacco products and goods and services with administratively controlled prices are presented separately. The index of goods and services with administratively controlled prices is calculated through the elementary aggregates level in the consumer basket.


Annual Inflation and Contributions by Major Group of Goods and Services(percentage points, per cent)


The cumulative balance of payments current and capital account was positive at EUR 1588.0 million. The surplus increased significantly on the same period of 2015, reflecting mainly trade deficit and primary income deficit contraction. The decrease of the trade balance deficit was driven by both higher annual growth in real exports com-pared to real imports and favourable trading terms in the first half of 2016. The primary income deficit resulted from lower outflows of dividend and distributed profit to foreign investors in Bulgaria.

21

Econom

ic Develop

ment in the First H

alf of 2016Based on foreign trade statistics,25 between January and June nominal goods exports fell 3.6 per cent from the same period of 2015, reflecting lower mineral products and metals exports, mainly as a result of decreased international prices. Nominal goods imports fell 6.2 per cent on an annual basis due mainly to lower imports of energy re-sources and, to a lesser extent, raw materials. Decreased energy commodity imports were caused by international oil price dynamics, whereas imported physical volumes registered growth on an annual basis.

Services and capital account surplus growth additionally pushed up the current and capital account surplus. The positive services balance rose slightly, with growth in both exports and imports. Annual growth in tourism revenue was the major factor behind services export growth. In services imports, the strongest increase was in Bulgarian residents’ travel expenditure and other business services. At the same time, capital ac-count surplus increased, largely through late 2015 investment expenditure reimbursed by the European Commission for the 2007–2013 programme period and, to a lesser ex-tent, advance payments under 2014–2020 period Operational Programmes.

The year on year decline in the secondary income item had a dampening effect on the overall current and capital account balance. This was mainly because of lower EU Operational Programme receipts and lower EC Common Agricultural Policy reimburse-ments than in the same period of 2015.

BOP financial account balance was negative, deficit shrinking substantially from the same period of 2015 due to stronger increases in assets than in liabilities. The increase in financial account assets resulted mainly from banks boosting their foreign assets. Rising financial account liabilities reflected primarily foreign funds attracted from other sectors,26 notably as direct and other investment and Eurobonds issued by the gov-ernment on international capital markets. Preliminary BOP data for the first half of 2016 show that direct investment liabilities (reporting direct investment into Bulgaria) were EUR 1062.7 million. In June gross external debt increased by 802.2 million from the end of 2015 to EUR 34.9 billion (77.9 per cent of GDP). This was mainly driven by the general government foreign debt. Intercompany loans also grew, while banks’ and other sectors’ foreign debt 27 fell from the end of 2015.

Over the January to June 2016 period all current, capital, and financial transactions increased BNB international reserves by EUR 1830.6 million according to balance of payments data (valuation adjustments and price revaluations excluded). If changes in international foreign reserves on the BNB Issue Department balance sheet are taken into account, including valuation adjustments and price revaluations, they grew by an estimated EUR 2157.0 million on the end of 2015.

Retention of the high savings rate in the economy and low lending in the first half-year fuelled the trend toward attracted funds growth significantly outpacing credit growth in the domestic banking system.

Non-government sector deposits continued growing comparatively fast, household de-posits making the strongest contribution. Households saved primarily in overnight de-posits and, to a much lesser degree, deposits redeemable at notice and time deposits, unlike 2015 when they preferred mainly time deposits. Changed household preferences can be attributed largely to the ongoing trend toward decreasing interest rates. Non-financial corporations continued to keep their free funds in overnight deposits. By the

25 The analysis employs balance of payments data in accordance with the sixth edition of the IMF Balance of Payments and International Investment Position Manual (IMF, 2008): BPM6. BPM6 introduced major methodological changes in reporting goods and services trade, leading to a mismatch between data on them and those on international goods trade compiled by the NSI.

26 Excluding other monetary financial institutions and general government sectors.27 Excluding trade and bond loan liabilities.

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end of June household and non-financial corporation deposits rose 6.8 and 12.9 per cent annually, contributing 4.6 and 3.5 percentage points to the 9.5 per cent overall growth of non-government sector deposits. In terms of currency structure, households and non-financial corporations continued to save primarily in national currency.

Growth in non-financial sector overnight deposits continued driving their leading role in the annual increase of broad money, while money outside MFIs and deposits with an agreed maturity preserved their lower contributions. In June the annual growth rate of broad money was 8.9 per cent on 8.8 per cent at the end of 2015.

Annual Rate of Change in М3 and Contribution by Component(percentage points; per cent)

Source: the BNB.

Annual Growth of Non-government Sector’s Deposits and Contribution by Sector (percentage points; per cent)

Source: the BNB.

In the first half of 2016 the rate of decline of claims on non-financial corporations and households moderated on an annual basis. In June claims on the non-government sec-tor fell 0.8 per cent on the same period of 2015 (-1.6 per cent at the end of 2015). On an annual basis, the decline in claims on non-financial corporations (-1.5 per cent) con-tinued to be greater than that in claims on households (-0.7 per cent). Consumer loans and overdrafts made the main negative contributions to household lending growth. At

23

Econom

ic Develop

ment in the First H

alf of 2016the same time, other loans and those for house purchase made a low positive contribu-tion in May and June.

Factors exerting a dampening effect on credit developments involve mainly continu-ous bank portfolio optimisation and prudent lending policy. The first half-year saw a further annual decline in bad and restructured loans. On the other hand, regular loans and newly extended loans grew year on year, indicating increasing demand possibly because of declining loan interest rates.

Annual Growth of the Credit to Non-financial Corporations and Contributions by Individual Loan Types

(per cent)

Source: the BNB.

Annual Growth of Household Credit and Contributions by Individual Loan Types (per cent)

Source: the BNB.

The BNB quarterly lending survey showed net tightening of bank standards in approv-ing corporate credit applications. Over the review quarter major factors behind corpo-rate credit policy tightening included banks’ lower risk appetite, heightened collateral risk, and bank concerns of decreased borrower solvency. As regards household loans, banks eased their standards, especially for consumer loans. Eased lending standards for households primarily reflected increased competition between banks, rising vol-umes and falling costs of attracted funds, high liquidity in the banking system, lowered

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risk assessments, and heightened bank risk appetite. In particular, the overall macro-economic environment and favourable housing market outlook influenced risk assess-ment positively.

As regards credit demand, banks reported growing demand by households and, to a lesser extent, corporations. This dynamics was broadly driven by low interest rates. Other important factors behind rising demand for corporate loans involve businesses’ working capital and inventories needs to refinance, restructure, or renegotiate debt. As regards consumer credit, rising demand also reflected intensified demand for durable and other goods for current consumption. Housing loan demand, however, was driven by the favourable outlook in the residential property market, as well as first home or ad-ditional property purchases or old debt refinancing.

Banking system liquidity remained high.28 Unlike 2015 when banks redirected signifi-cant funds into deposits with the BNB as excess reserves, in the first half of 2016 they increased largely their foreign assets and Bulgarian government securities portfolios, while cutting their foreign liabilities. Bank excess reserves posted a one-off drop in January under the influence of amendments to BNB Ordinance No 21 on the Minimum Required Reserves Maintained with the Bulgarian National Bank by Banks (effective since early 2016). These amendments introduced the ECB deposit facility rate to bank excess reserves where this rate is negative.29 By June 2016 banks’ net foreign assets rose to BGN 6.2 billion from 2.6 billion in December 2015.

Bank transactions with the BNB in reserve currency (euro) are the main instrument for managing their lev liquidity. This took advantage of the main function of the currency board: buying and selling levs for euro at the fixed exchange rate set by the Law on the Bulgarian National Bank.30 Total foreign currency market turnover was EUR 313.3 billion,31 increasing 20.5 per cent on the same period of 2015. Transaction volumes between banks and the BNB increased, while year on year turnover in the other two major segments, i.e. trading between banks and their customers and interbank trading (excluding the BNB), fell. In 2016 the structure of traded currencies remained broadly unchanged from the same period of 2015.

Amid high banking system liquidity, traded volumes in the lev interbank market fell on an annual basis. Application of the negative ECB deposit facility rate to domestic bank excess reserves accelerated ECB monetary policy transmission to Bulgarian interbank money market rates. Interest rates declined across all maturities traded between banks over the first half-year.

Average interest on interbank deposits and repurchase agreements was -0.06 per cent, down 8 basis points from 2015. The spread between LEONIA and EONIA expanded initially to 29 basis points in March, after which it shrunk to -5 basis points in June. Be-tween January and June volatile LEONIA dynamics reflected the small number and low volumes of money market transactions of banks included in the index. As of June the averaged values between bid and offer quotations on unsecured deposits with maturi-ties up to three months declined to a negative territory.

The volume of interbank money market transactions was BGN 6.0 billion, down 26.8 per cent on the same period of previous year. Deposits comprised 58.4 per cent of turno-ver, and repo operations in government securities 41.6 per cent. Overnight transactions dominated deposit transactions between banks at 82.9 per cent.

28 See Chapter VI.29 For further information on the amended Ordinance No 21 in force since 4 January 2016 and bank excess reserve

dynamics, see Chapter IV of this Report.30 See Chapter II.31 This turnover comprises transactions between banks and the BNB in foreign currency against levs with a spot value

date of up to two business days and the double volume of both BNB trade with banks and trade between banks themselves.

25

Econom

ic Develop

ment in the First H

alf of 2016Interbank Money Market Interest Rate

(per cent)

Sources: the BNB, the ECB.

Interbank Money Market Yield Curve(per cent)

Note: Average SOFIBOR/SOFIBID index.

Source: the BNB.

The surplus on the cash based consolidated fiscal programme was BGN 3070.7 mil-lion.32 The improved fiscal position on June 2015 (up BGN 2181.2 million) resulted from both good tax and non-tax revenue and a significant reduction in capital expenditure.

Total government revenue and grants grew 8.6 per cent on an annual basis driven mainly by tax and non-tax revenue, rising 7.4 and 1.7 percentage points. The annual growth in tax revenue for the first half-year (9.8 per cent) was mainly driven by changes in tax legislation (including higher tobacco excise duties), measures to boost tax col-lection, and growing household consumption and compensation per employee in the economy. Revenue from grants decreased by 3.3 per cent on the same period of previ-ous year, including mostly EC reimbursements on expenditure at the end of 2015 from the 2007–2013 programme period and, to a lesser extent, advance payments for the 2014–2020 period.

32 Based on quarterly MF data on consolidated fiscal programme.

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In June consolidated fiscal programme expenditure fell 5.0 per cent annually, due mainly to -56.0 per cent lower capital expenditure33 reflecting poor absorption of EU programme funds in the half-year. Current expenditure grew 3.4 per cent due to social payments and employee compensation, rising 3.8 and 2.6 per cent, while the contribu-tion to the EU budget and operating expenditure fell 21.4 and 0.2 per cent.

The first half-year saw BGN 3662.8 million positive external financing mainly through the seven and 12 years 14 March benchmark issues on international capital markets worth a total of EUR 1994 million. The net government securities issue on the domestic market was negative at BGN -345.5 million against BGN 500 million issued since the start of the year.34

Funds on the positive net debt financing and accumulated cash surplus for the first half-year were used to boost the fiscal reserve deposits which rose by BGN 5839.6 mil-lion on end-December 2015. The fiscal reserve, including claims on EU funds over certified expenses, advance and other payments, reached BGN 14,131.5 million, of which BGN 12,628.4 million on fiscal reserve deposits. Following transfers from the central budget, accumulated funds in the State Fund for Guaranteeing the Stability of the State Pension System (the Silver Fund), part of the fiscal reserve, increased by BGN 107.5 million to BGN 2641.6 million.

All Bulgarian Eurobond yields fell on the end of 2015, with medium and long-term is-sues ranging from -16 basis points for the issue maturing 2022 to -30 basis points for the issue due in 2035. By the end of June the yield on bonds maturing in 2017 hovered around nil. Yields on the two new benchmark issues of March 2016 also fell.

The leading Bulgarian Stock Exchange SOFIX and BGBX40 indices followed broadly downward trends. At the end of June both declined on the end of 2015, SOFIX by 1.2 per cent, and BGBX40 by 3.9 per cent.

Bulgarian Stock Exchange Indices

Sources: the BNB, Bulgarian Stock Exchange.

Secondary market stock trading dropped 35.1 per cent to BGN 116.1 million and bourse bond turnover dropped 73.2 per cent to BGN 17.8 million. Over-the-counter eq-uity transactions totalled BGN 466.3 million and those in bonds BGN 48.8 million. In June 2016 market capitalisation of the Bulgarian Stock Exchange, Sofia, was BGN 8.1 billion or 9.2 per cent of GDP, from 9.9 per cent at the close of 2015.

33 Including growth in the government reserve.34 For more information on government securities primary and secondary markets, see Chapter VIII.

27

Gross International R

eserves

II. Gross International Reserves

The BNB manages its gross international reserves in line with the Law on the Bulgar-ian National Bank,35 investment constraints, business procedures and methodologies, and opportunities offered by international financial markets. BNB gross international re-serves comprise the assets on the Issue Department’s balance sheet and their role is to provide complete cover for monetary liabilities under the fixed exchange rate of the lev to the euro provided for by the Law on the Bulgarian National Bank36. The excess of gross international reserves over monetary liabilities forms the Banking Department Deposit item or the net value in the Issue Department’s balance sheet37.

Gross International Reserves and Banking Department Deposit(EUR million) (EUR million)

Note: The chart shows daily movements of the Issue Department balance sheet figure and the Banking Department De-posit in the Issue Department balance sheet.Source: the BNB.

35 There were no Law on the BNB amendments concerning the statutory regulatory framework for gross international reserve management in 2015.

36 The Law on the BNB Article 28, paragraph 2 defines the Bank’s monetary obligations as all circulating cash issued by the BNB, and all balances of other entities’ BNB accounts, except the IMF. Article 28, paragraph 3 defines what assets may comprise gross international reserves: monetary gold; Special Drawing Rights; banknotes and coins in freely convertible foreign currency; funds in freely convertible foreign currency held by the BNB on accounts with foreign central banks or other financial institutions or international financial organisations with one of the two highest ratings by two internationally recognised credit rating agencies; securities issued by foreign countries, central banks, other foreign financial institutions, or international financial organisations assigned one of the two highest ratings by two internationally recognised credit rating agencies; the balance on accounts receivable and payable on BNB for-ward or repo agreements with (or guaranteed by) foreign central banks, public international financial organisations or other foreign financial institutions with one of the two highest ratings from two internationally recognised credit agencies; and BNB futures and options which bind non-residents and which are payable in freely convertible foreign currency. The Law on the BNB stipulates that these assets are estimated at market value.

37 Under Article 28, paragraph 1 of the Law on the BNB, ‘the aggregate amount of monetary liabilities of the BNB shall not exceed the lev equivalent of gross international reserves”, with the lev equivalent determined on the basis of the fixed exchange rate.

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1. The Amount and Structure of Gross International Reserves

By the end of June of 2016 the market value of gross international reserves was EUR 22,442 million: an increase of EUR 2157 million38 or 10.63 per cent. Major factors affecting the market value of assets include income from asset management, income from foreign currency revaluation and external cash flow effects. External cash inflows revenue of EUR 1723 million made the largest net positive contribution to the increase in international reserves in the first half of 2016.

External Cash Flows in Foreign Currency(EUR million)

January–June 2015 January–June 2016

I. euro purchases and sales

at tills -17 -24

with banks 11 -1,442

purchases from banks 47,049 67,727

sales to banks -47,038 -69,169

Subtotal I -6 -1,466

II. Currency flows with banks, the MF, etc.

1. Banks’ Reserves (including minimum required reserves) 396 216

2. Government and other depositors 2,079 2,973

Subtotal II 2,475 3,189

total I+II 2,469 1,723

Notes: The sum total may not add up due to rounding.

Source: the BNB.

Most of the positive external flows on the Ministry of Finance accounts with the BNB came from two Eurobonds issues of EUR 1958 million issued on international markets in March. EUR 1434 million revenue from EC payments to Bulgaria contributed to the government funds increase. Net funds in commercial banks’ accounts with the BNB (in-cluding minimum required reserves) were EUR 216 million.

EUR 1442 million net sales of reserve currency to banks reduced foreign reserves: a reversal on the first half of 2015, when the BNB bought EUR 11 million from commercial banks. The MF also made significant government debt principal and interest repay-ments of EUR 365 million.

The share of gold in gross international reserves fell on 2015. Over the half-year it aver-aged 7.21 from 7.50 per cent in 2015. This was mainly due to large cash inflows to the Issue Department balance sheet which boosted the share of euro-denominated assets to on average of 91.79 per cent.

Currency Structure of Gross International Reserves(per cent)

CurrencyIssue department balance sheet assets

2015 January–June 2016

EUR 91.55 91.79

USD 0.70 0.50

XAU 7.50 7.21

XDR 0.24 0.50

CHF 0.01 0.00Note: Average values calculated on a daily basis for the period.

Source: the BNB.

38 Balances in banks' TARGET2 national system component accounts (worth EUR 119 million at the end of June), and the two tranches of SDR 611 million disbursed in August and September 2009 upon general SDR allocation by the IMF are not included in the analysis of changes in BNB gross international reserves below. For further details see An-nual Report, 2009, p. 26.

29


eservesThe share of cash fell in the structure of assets by financial instrument, mainly reflecting a higher liquidity portfolio in euro in the second quarter of 2016. Most assets (70.15 per cent) continued to be invested in securities.

Gross International Reserves by Financial Instrument(per cent)

Financial instruments 2015 January–June 2016

Vault cash* 4.51 4.00

Deposits** 25.54 25.85

Securities** 69.95 70.15

* Account balances, payments, and monetary gold.** Including instruments in foreign currency and gold.

Note: Average values calculated on a daily basis for the period.

Source: the BNB.

In the first half of 2016 most assets (averaging 57.69 per cent) in the structure of inter-national reserves by residual term to maturity continued to be invested in the maturity sector of up to a year (current accounts, short-term deposits in foreign currency and gold, and short-term securities). Investment in the one to three year maturity sector rose, falling in the three to five and five to ten year sectors, as shown in the table below.

Gross International Reserves by Residual Term to Maturity(per cent)

Maturity sectors 2015 January–June 2016

Up to a year 57.27 57.69

One to three years 18.50 23.50

Three to five years 13.88 12.36

Five to ten years 10.35 6.45

Over ten years 0.00 0.00

Notes: Average values calculated on a daily basis for the period. The sum total may not add up to 100 per cent due to rounding.

Source: the BNB.

2. Gross International Reserves Risk and Return

In the first half of 2016 international securities market developments mainly reflected anticipated Federal Reserve and ECB monetary policy measures, largely driven by sluggish inflation target attainment and worsening global economic growth prospects. Uncertainty on the potential economic effects of the UK EU membership referendum, which was in favour of leaving the EU, was also a major factor on global financial markets.

Very low euro area inflation in early 2016 made markets expect additional ECB monetary policy measures. In March the ECB launched additional standard and non-standard monetary policy measures whose scope and amount exceeded prevailing market expectations. This cut euro area money and bond market interest rates significantly. US government bond yields also fell in early 2016 due to worsened global economic growth prospects which prompted demand for safe assets and curtailed market expectations of a rise in the federal funds rate. In the second quarter of 2016 euro area and US government bond prices were driven to a large degree by rising uncertainty on the UK EU referendum, which cut market participants’ risk appetite. At the end of the half-year the referendum, in favour of the UK leaving the EU, surprised most market participants and boosted demand for safe assets like gold and German and US government bonds.

The Market Environment

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Central banks’ policies

Unfavourable euro area economic and financial conditions and ECB inflation and growth forecasts revised downwards, prompted the ECB 10 March meeting to cut main refinancing operations and marginal lending facility interest by 5 basis points each to nil and 0.25 per cent and cut the deposit facility rate by 10 basis points to -0.4 per cent. The ECB also moved to broaden non-standard monetary policy measures. The additional measures exceeded market participants’ expectations and involved: (i) rais-ing the volume of monthly purchases under the expanded asset purchase programme (APP) from April 2016 from EUR 60 to EUR 80 billion; (ii) including EUR-denominated investment grade bonds issued by euro area non-bank corporations, established in the euro area, in the purchases under APP (new Corporate Sector Purchase Programme, CSPP), with the implementation started on 8 June 2016; (iii) launching of new series of Targeted Longer-term Refinancing Operations (TLTRO II), to be carried out on a quarterly basis from June 2016 to March 2017, with each operation lasting four years. TLTRO II interest is fixed to main refinancing operations interest on the date of each operation, with an opportunity to reduce the rate if bank credit exceeds a set volume criterion. Depending on the percentage by which banks exceed their benchmark stock of eligible loans interest rate may be cut to the level of the deposit facility rate on the day of the operation. As regards the Public Sector Purchase Programme (PSPP), the ECB Governing Council decided to increase the share of purchased euro-denominated bonds issued by international organisations and supranational development banks from 33 to 50 per cent of the volume of each issue and of total outstanding securities of each issuer. It also cut the share of monthly PSPP purchases from 12 to 10 per cent from early April 2016, while raising its share in PSPP purchases from 8 to 10 per cent.

On 24 June 2016 the ECB conducted the first TLTRO II operation, allotting EUR 399.3 billion between 514 banks. The EUR 38.2 billion net effect on banking system liquidity was very low, however, as banks repaid EUR 367.9 billion of their TLTRO I participation early.

In the first half of 2016 the ECB balance sheet figure increased 13.1 per cent on the end of 2015 to EUR 3.13 trillion. The increase was mainly due to PSPP EUR 389.6 billion of public assets purchases since the end of 2015, EUR 41.1 billion of covered bonds under the CBPР3 (since the end of 2015), EUR 4.9 billion of asset-backed securities under the ABSPP (since the end of 2015), and EUR 6.4 billion of corporate bonds under the CSPP (since the start of the programme). Euro area banking system excess liquid-ity rose to EUR 859.9 billion on EUR 660.8 billion at the end of 2015. This, and the cut in ECB interest rate, pushed average EONIA overnight deposit interest rate down to -0.30 per cent in the first half of 2016 from -0.14 in the second half of 2015. EURIBOR interbank market deposit interest followed a downward trend. At the end of June the in-terest rate on one-month deposits fell 16 basis points to -0.36 per cent, and interest rate on six- and 12-month deposits fell 14 and 11 basis points to -0.18 and -0.05 per cent.

The Federal Reserve System kept the target range for the federal funds rate unchanged at 0.25 to 0.50 per cent and continued reinvesting the proceeds of maturing US gov-ernment and mortgage bonds on its balance sheet in analogous instruments. Low US inflation and rising external risks, including uncertainty on the UK referendum, were the main FOMC arguments for leaving the target range for the federal funds rate un-changed. In press releases following the March and June meetings, FOMC members continued emphasising the importance of incoming economic information for determin-ing the time and extent of future changes to the target range for the federal funds rate. After the FOMC June meeting FOMC members’ published individual forecasts revising their March forecasts of adequate federal funds rate levels at the end of 2017 and 2018 and the long-run equilibrium level downwards. The median forecast of adequate fed-eral funds rate level at the end of 2016 remained unchanged at 0.9 per cent, however.

31


eservesEuro Area and US Sovereign Bond Yields

In the first half of 2016 the German government bond yield curve flattened significantly as long-term maturity sector yields fell. Yield in the 10 and 30-year maturity sector fell on 2015 by 76 and 111 basis points to -0.13 and 0.38 per cent. Yield in the two-year maturity sector fell 32 basis points to -0.66 per cent. The main reasons why German government bond yields fell were the significant worsening of euro area inflation pros-pects and additional ECB monetary policy measures exceeding market expectations. Increased ECB purchases under the PSPP greatly cut back the supply of German government bonds, depressing yields. German government bond yield dynamics in the second quarter reflected financial market uncertainty about the UK referendum. The vote for the UK to leave the EU surprised most market participants, prompting ex-tremely strong financial market volatility and boosting demand for safe assets. On 24 June, the day following the referendum, yield dropped significantly, all German govern-ment bonds with residual terms to maturity of up to 15 years traded at negative annual yields by the end of June. US Federal Reserve System signals that US monetary policy normalisation would take longer, and lower market participants’ risk appetite, contrib-uted to the drop.

Compared to reference German bonds, euro area periphery government bond yield spreads widened in the first half of 2016, with spreads on Portuguese, Italian, Spanish, and Irish government bonds expanding more. The main reason for this was lower in-vestor risk appetite reflecting worsened global economic growth prospects. Euro area periphery bond yield spreads continued widening in the second quarter of 2016 com-pared with German bonds mostly because of uncertainty on the UK referendum. This limited market participants’ risk appetite and caused a strong investment outflow from higher risk assets. Spreads additionally reflected factors specific to set euro area coun-tries: Portugal breaching the 2015 budget deficit target and need for additional fiscal consolidation measures in the current year; Italy’s huge amount of non-performing bank loans and rising concern about the state of banks there; increasing Spanish political risk and breaching the 2015 budget deficit target; and the strong links between the Irish and UK economies causing concern after the UK decision to leave the EU. Govern-ment bond yields spreads widened more in long-term maturity sectors: within the 10-year sector Portuguese, Italian, and Spanish spreads widened most at 125 to 314, 42 to 139, and 15 to 129 basis points. In the two-year sector Portuguese, Italian, and Irish spreads widened most at 79 to 124, 24 to 56, and 17 to 31 basis points.

The US government bond yield curve measured by ten and two-year bond yield dif-ferences dropped 33 basis points on the end of 2015. This resulted from the greater 80 basis point yield decline of 10-year bonds compared with the 47 basis point decline in two-year bond yields. Over the review period the yield of US government securities fluctuated significantly. Two-year bond yield varied from 0.58 to 1.05 per cent, while 10-year yield was almost twice as wide at 1.44 to 2.27 per cent. Securities prices re-flected mostly large central bank moves, divergent economic information from leading world economies like the USA, the euro area, and China, and falling market expecta-tions of US interest rate rises amid the uncertainty caused by the UK referendum.

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Government Bond Yields in the First Half of 2016(per cent)

Gold Price and Exchange Rates

In the first half of 2016 the gold price rose 23.9 per cent in US dollars and 21.5 per cent in euro. It moved within the relatively wide range of USD 1075 to 1325 and EUR 977 to 1201 per troy ounce. The major reason for gold appreciation was flight to safety amid global stock market volatility. Falling market expectations of the rate of US Federal Re-serve interest rises also boosted gold price. Imposition of negative interest on a portion of Japanese banks’ reserves and the cut in the ECB deposit facility rate also boosted the gold price. In late June gold appreciated strongly to a two-year peak, mostly be-cause of the UK referendum.

The US dollar dropped 1.9 per cent on the euro, mostly in the first quarter. The USD/EUR rate moved within the relatively narrow range of 0.87 to 0.93, showing mod-erate volatility. In the first quarter the US dollar steadily depreciated against the euro as markets expectations of deepening differences between euro area and US monetary policies gradually subsided. This reflected reducing prospects of an increase in the US federal funds rate, while the scope and extent of ECB measures in early March ex-ceeded prevailing market expectations. In the second quarter US dollar depreciation gradually reversed, reflecting uncertainty and then surprise on the UK referendum, fol-lowed by uncertainty on the EU economy.

33


eservesThe USD/EUR Exchange Rate

(EUR)

Troy Ounce Gold Price in US Dollars (USD)

Troy Ounce Gold Price in Euro (EUR)

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Major Types of Risk

Over the first half of 2016 net value risk in the Issue Department balance sheet meas-ured by value-at-risk (VaR) was 14.21 per cent on an annual basis.39

International reserve interest rate risk measured by reserves’ average modified dura-tion was 1.53 years. The duration maintained was 0.24 years shorter than the average for 2015. The limit for maximum deviation in the modified duration of investment portfo-lios from benchmark was in an asymmetric range of -0.40 to +0.10 years due to greater global financial market fluctuations.

Gross international reserve currency risk was constrained by the Law on the BNB stipu-lation that the sum of the absolute values of open foreign currency positions40 in cur-rencies other than euro, SDR, and monetary gold, should not exceed 2 per cent of the market value of monetary liabilities in these currencies. There were minimal open posi-tions in foreign currencies in the reporting period, the open position in monetary gold posing the main currency risk to the BNB.

The Bank continued its conservative credit risk policy in gross international reserve in-vestment. New limits on various types of investment exposures to individual countries were adopted in early 2016. Countries were divided into three groups by credit risk level according to current country exposure distribution principles. The requirement for a minimum weight as a share of international reserves in securities issued in euro by non-EU countries, government guaranteed issuers, or financial institutions, rose from 10 to 15 per cent in early 2016.

To achieve its main objective of very high international reserve security and liquidity, the BNB continued investing the main share of assets into euro area core country govern-ment bonds and government guaranteed debt, and into short-term deposits with first class foreign banks.

By the end of the first half of 2016 about 65 per cent of international reserves were in-vested into assets with the highest AAA long-term credit rating.

Operational risk was managed in strict compliance with, and control over, investment constraints and relevant business procedures for international reserve management.

Net income from assets in euro is the sum of three components: (i) income from invest-ment of gross international reserves in the original currency; (ii) income from currency imbalance;41 (iii) expenditure/income from liabilities. BNB income from international re-serve investment was positive at EUR 115.66 million: 0.6 per cent yield. This reflected the continued decline in government bond yields, which boosted the price of govern-ment bonds in the BNB portfolio. Currency imbalance income of EUR 275.86 million was almost entirely due to the change in the monetary gold price in euro. New interest accrued on banks’ excess reserves with the BNB in early January and negative market rates charged to other customers’ balance sheets, made the net financial result from liabilities in the first half of the year positive at 0.03 per cent or EUR 4.83 million. The above three components brought net returns from international reserve management to EUR 396.35 million, a 2.06 per cent half-year return42.

39 VaR = -X% (X>0), at 95 per cent confidence level and allowing for normal yield allocation means that 95 per cent of the time maximum net value loss would not exceed X per cent.

40 An open foreign currency position is the difference between the value of assets and liabilities in any currency other than euro.

41 Currency imbalance income is the result of the effects of exchange rate movements on assets’ and liabilities’ open foreign currency positions.

42 Total return is obtained as a product, rather than simple sum, of the return of the relevant components.

Return and Efficiency

35


eservesInternational Reserves Income and Return in the First Half of 2016

Periodnet income

(euR million)net return1

(per cent)

Income (euR million)

Return(per cent)

Income (euR million)

Return(per cent)

expenditure (euR million)

Return(per cent)

on assetson currency revaluation of assets and liabilities

on liabilities

First quarter 205.98 1.13 68.88 0.37 134.78 0.74 2.32 0.01

Second quarter 190.37 0.91 46.78 0.22 141.08 0.68 2.51 0.01

total 396.35 2.06 115.66 0.60 275.86 1.43 4.83 0.03

1 Return between time T0 and time TN is calculated by chain-linked returns for this period. It is calculated using the following formula: R(T0,TN )=(1+r1 )(1+r2 )…(1+rN )–1. This formula for calculating investment returns comply fully with the Global Investment Performance Standards (GIPS).

Source: the BNB.

For operational management purposes, international reserves are split into portfolios by currency and investment goal, each with a benchmark, investment goals, and in-vestment limits. The table below shows major BNB portfolios and the results from their management.

Portfolio Return and Risk in the First Half of 2016

Portfolio and type of asset

Return Volatility (risk)Information

ratio***absolute(per cent)

Relative*(basis points)

absolute(basis points)

Relative**

(basis points)

Investment 1, EUR 0.77 -12 39 19 -0.84

Investment 2, EUR 0.70 -18 36 24 -1.06

External manager А, EUR 0.92 1 64 4 0.35

External manager B, EUR 0.88 -3 60 9 -0.53

Liquid, EUR -0.12 11 1 1 -

Liquid, XAU 0.23 11 7 6 -

Liquid, USD 0.35 23 7 7 -

1 A portfolio’s positive relative return is attained profit against benchmark return. Relative returns with a negative sign are interpreted as opportunity cost in portfolio management. 2 Relative volatility (relative risk) against benchmark indicates the degree of deviation of portfolio risk characteristics from benchmark through active portfolio management. The risk is on an annual basis.3 Information ratio is the ratio between relative portfolio return and relative portfolio risk on an annual basis.

Source: the BNB.

To diversify management styles and reduce operational risk, most euro-denominated assets continued being split into two investment portfolios with identical benchmarks and investment limits, managed by different BNB teams. By the end of the first half of 2016 around 4 per cent of gross international reserves was managed by external man-agers that were international financial institutions. Beside additional diversification, us-ing external managers helped exchange expertise in international market investment management. Liquidity portfolios were intended mainly to assist immediate BNB foreign currency payment needs.

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III. Payment Systems and Payment Oversight

The Law on the Bulgarian National Bank tasks the Bank with payment system organ-isation, support, and development by assisting the implementation, operation, and oversight of efficient payment mechanisms. The Bank’s major goals are curbing sys-temic risk and integrating Bulgarian payment systems into the European payment infrastructure.

Bulgaria’s lev payment systems are:

• RINGS, a real-time gross settlement system operated by the BNB;

• RINGS has these transaction settlement ancillary systems:

– BISERA, for settling customer transfers at a designated time, operated by BORICA–Bankservice AD;

– BORICA, for servicing bank card payments in Bulgaria, operated by BORICA–Bankservice AD.

Bulgaria’s euro payment systems are:

• The TARGET2 national system component, TARGET2-BNB, run by the BNB;

• The TARGET2-BNB ancillary settlement system:

– BISERA7-EUR, a system for servicing customer transfers to be settled at a designated time, operated by BORICA–Bankservice AD;

Bulgaria’s securities settlement systems are:

• The book-entry government securities settlement system, run by the BNB;

• The book-entry securities registration and servicing system, run by the Central Depository.

1. Lev Payment Systems

In the first half of 2016 the RINGS real-time gross settlement system processed most lev payments in Bulgaria. Their value occupied 86 per cent of all payments; the 80 per cent value share is deemed optimal for real-time gross settlement systems. RINGS also processed 0.4 per cent of lev non-cash payments in Bulgaria.

BORICA transactions rose 9.9 per cent in number and 12.7 per cent in value on the first half of 2015. ATM cash withdrawal number and value picked up 5.2 and 11.4 per cent. BORICA-authorised POS terminal transactions rose 36.7 and 32.6 per cent in number and value.

In the first half-year BISERA transactions rose 5.5 and 3.3 per cent in number and value on the same period last year.

37

Paym

ent System

s and P

ayment O

versight

Bulgarian Lev Payment Shares by Payment System in the First Half of 2016

Source: the BNB.

Processing most payments in Bulgaria through RINGS cut payment risk: one of the major goals of a central bank. Between January and June RINGS processed BGN 437 billion in 463,483 payments: a 17.5 per cent value rise and a 2.6 per cent number fall year on year. There were 412,913 customer payments (89.1 per cent) for BGN 88,945 million (20.4 per cent). There were 3738 payments for BGN 3524 million per average day. During the first six months 67 per cent of payment value was processed by noon and 87 per cent by 2:30 pm. As regards system traffic, 83 per cent of RINGS payments went through by 2:30 pm. RINGS offered 100 per cent availability. As of 30 June 27 banks participated in RINGS.

RINGS Payment Number in the First Halves of 2015 and 2016

Source: the BNB.

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RINGS Payment Value in the First Halves of 2015 and 2016(BGN million) (BGN million)

Source: the BNB.

2. Euro Payment Systems

The BNB operates the TARGET2-BNB national system component and is responsible for the business relations of its participants and coordination with the European Central Bank and participant central banks. On 30 June 2016 the system included the BNB, 21 direct participant banks, four addressable BIC holders, and two ancillary systems: the BISERA7-EUR for settling customer transfers in euro at a designated time and the BNBGSSS for government securities registration and settlement at the BNB.43

TARGET2-BNB Payment Number in the First Halves of 2015 and 2016

Source: the BNB.

43 For a current list of TARGET2 participants in TARGET2-BNB, see the BNB website: http://www.bnb.bg/PaymentSys-tem/PSTARGET2/PSTARGETList/index.htm

http://bnb.bg/PaymentSystem/PSTARGET2/PSTARGETList/index.htm?toLang=_EN

http://bnb.bg/PaymentSystem/PSTARGET2/PSTARGETList/index.htm?toLang=_EN

39

Paym

ent System

s and P

ayment O

versight

TARGET2-BNB Payment Value in the First Halves of 2015 and 2016(EUR million) (EUR million)

Source: the BNB.

In the first half of 2016 TARGET2-BNB processed 108,421 payments for EUR 178,070 million, including 89,081 customer payments for EUR 3578 million. Payments rose 2.5 per cent by value and fell 5.5 per cent by number on the first half of 2015.

The value and number of other system component payments to banks comprised 83 and 89 per cent of payments. There were 854 daily average TARGET2-BNB payments, worth EUR 1402 million. The daily value peak was EUR 3815 million, with a daily numbers peak of 1518.

The BISERA7-EUR ancillary system processes designated time customer euro trans-fers. It processed 15,636 payments for EUR 159 million, down 15 per cent in value and 5 per cent in number on the first half of 2015. The BISERA7-EUR payment system for small payments in euro, operated by BORICA–Bankservice AD, processes only SEPA credit transfers and direct debits. By mid-year almost all banks and foreign bank branches in Bulgaria processed SEPA credit transfers, their share reaching 61.3 per cent of customer payments in euro.

3. Bulgarian Payment and Settlement System Development

As of 30 June 2016, 93.7 per cent of Bulgarian cards, including 93.9 per cent of debit and 92.9 per cent of credit cards had migrated to the EMV standard.44 EMV implemen-tation into the card payments infrastructure was almost complete, with 100 per cent ATMs and 99.9 per cent of POS terminals migrated.

The BNB helped draft amendments to the Law on Payment Services and Payment Sys-tems45 to transpose Directive 2014/92/ЕU of the European Parliament and of the Coun-cil of 23 July 2014 on the comparability of fees related to payment accounts, payment account switching, and access to payment accounts with basic features. The Directive harmonises EU requirements in three major areas: comparability of fees charged by banks and other payment service providers on payment accounts; establishing a quick

44 The EMV is a global standard for credit and debit cards based on microprocessor technology (smart or chip cards). It was developed by Europay, Mastercard and Visa to boost card payment security and limit abuse and misuse.

45 The law was enacted on 20 July 2016. The transposition of Directive 2014/92/ЕU came into force on 18 September 2016 as required by Directive Article 29, all remaining provisions coming into force within three days of promulgation as required by the Constitution Article 5, paragraph 5.

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and simple procedure for consumers wishing to change payment service providers within countries; enabling consumers legally residing in the EU to open payment ac-counts for basic payment operations irrespective of their place of residence and finan-cial status. The draft law introduces one of the Regulation options on interchange fees for card based payment transactions46, with the BNB being the authority responsible for compliance through sanctions and adequate and effective extra-judicial dispute resolution.

4. Payment Oversight, Licensing, and Entries

The Law on the BNB and the Law on Payment Services and Payment Systems man-date the Bank to regulate and oversee payment system operators, securities settlement systems operators as regards payment transactions, payment institutions, electronic money institutions, and other payment service providers.

On 21 January 2016 the Governing Council declined an electronic money licence to the Cash Credit EAD company under LPSPS Article 77, paragraph 2 in connection with Article 14, items 1 and 2 for failing to meet LPSPS Article 77, paragraph 2 in connection with Article 10, paragraph 4, item 5a to d, items 6 and 7 and relevant BNB Ordinance No 16 requirements.

On 11 April 2016 the Governing Council issued an electronic money licence to the Cre-dibul EAD company under LPSPS Article 77, paragraph 1 finding that it met all LPSPS Article 77, paragraph 2 in connection with Article 10, paragraph 4 and BNB Ordinance 16 requirements.

On 19 May 2016 the Governing Council licensed the Easy Payment Services EOOD company to provide LPSPS Article 4, item 4b and item 5 payment services on finding that it met all LPSPS Article 10, paragraph 4 and BNB Ordinance 16 requirements.

The Bank inspected two payment service providers in the half-year. The first inspection was on payment service provision through an agent and the second, on operating a company in other EU Member States.

Two companies were inspected to establish provision of payment services without due license.

These were the entries and deletions in/from registers under the BNB Law on Payment Services and Payment Systems Article 17 and BNB Ordinance 16 Articles 7 and 39:

– 98 agents were listed and 50 agents were delisted in the public register of li-censed payment institutions and electronic money institutions;

– 35 payment institutions and electronic money institutions licensed elsewhere in the EU and eligible to operate in Bulgaria were listed and eight delisted;

– 48 agents of payment service providers licensed elsewhere in the EU and eligible to operate in Bulgaria were listed and 82 delisted.

The period saw enquiries into 122 individual and corporate payment service user com-plaints to the BNB.

46 Regulation (EU) No 2015/751 of the European Parliament and of the Council of 29 April 2015 on Interchange Fees for Card-based Payment Transactions (OJ, L 123/1 of 19 May 2015).

41

Banks’ R

eserves at the BN

B

IV. Banks’ Reserves at the BNB

The new Ordinance No 21 of the BNB on the Minimum Required Reserves Maintained with the BNB by Banks47 came into force on 4 January 2016. It introduces a definition of excess reserves48. The new Ordinance applies negative interest on banks’ excess re-serves where the ECB deposit facility rate is negative, and zero interest where the ECB rate is positive or zero. Banks’ funds in the TARGET2-BNB national system component49 are no longer recognised as reserve assets.

From 4 January 2016 the BNB applied -0.30 per cent interest on banks’ excess re-serves, reduced to -0.40 per cent from 16 March. Banks thus cut Ordinance 21 excess funds in January from 127.8 per cent in December 2015 to 103.1 per cent in January 2016. In February minimum reserve excess rose to 108.1 per cent, followed by a grad-ual fall to 86.7 per cent in June. In the first half of 2016 funds in banks’ BNB Ordinance No 21 accounts exceeded minima by 94.8 per cent on an average daily basis.

Banks’ Reserves at the BNB(BGN million)

Source: the BNB.

In the first six months of 2016 the average daily value of banks’ attracted funds for re-serve calculation purposes (excluding central and local government funds) rose 4.2 per cent on the first half of 2015. This was due to an 11.0 per cent rise in lev denominated liabilities and a 2.8 per cent fall in foreign currency liabilities. The average daily value of residents’ funds (excluding central and local government funds) rose 8.8 per cent, and those from non-residents fell 28.4 per cent, funds attracted from non-resident banks falling 50.4 per cent. Banks’ central and local government liabilities fell 38.2 per cent. Changes in the structure of attracted funds boosted the effective implicit ratio of mini-mum required reserves by 0.4 percentage points on the first half of 2015 to 9.4 per cent

47 In addition to amending Ordinance No 21 on 26 November 2015, the Governing Council also changed the penalty interest charged for minimum reserve requirements breaches.

48 The new Ordinance No 21 Article 5, paragraph 1 defines excess reserves as all funds exceeding the reserve require-ment by more than 5 per cent.

49 The Issue Department Balance Sheet lists banks’ funds in the TARGET2-BNB national system as liabilities to banks.

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on average for the first half of 2016.50 Reserve assets covering this ratio include funds in banks’ BNB accounts (8.3 per cent) and 50 per cent of cash balances designated as reserves (1.1 per cent).

Structure of Attracted Funds in the Banking System*

* Average daily value for reserve calculation purposes. Note: The sum total may not add up to 100 per cent due to rounding.

Source: the BNB.

In the first half of 2016 the average daily value of lev assets rose 14.0 per cent on the same period last year, while euro assets came to 7.5 per cent, resulting in a change in the currency structure of bank reserve assets. The euro share of reserve assets rose to 44.1 per cent on an average daily basis on 43.8 per cent over the same period of 2015. The share of reserve assets in euro accounted for 22.6 per cent of banks’ total reserve assets with the BNB: a 1.1 percentage point increase from the 23.7 per cent in the same period of 2015.

50 BNB Ordinance No 21 sets banks’ minimum reserves at 10 per cent of their domestic and 5 per cent of their foreign reserve base. Central and local government funds are zero rated.

43

Currency in C

irculation

V. Currency in Circulation

The Bulgarian National Bank has a monopoly on banknote and coin issue in Bulgaria.51 Its currency is mandatorily acceptable as legal tender at face value without restriction. The Bank prints banknotes, mints coins, and keeps and scraps uncirculated or with-drawn currency.

Pursuant to LBNB Article 26, in December 2015 the BNB Governing Council decided to withdraw the 1999 issue BGN 1 banknote which ceased to be legal tender on 1 Janu-ary 2016.

As of 30 June 2016 currency in circulation (outside BNB vaults)52 reached BGN 12,657.8 million, up BGN 1428.6 million, or 12.72 per cent on the end of June 2015.

Banknotes and Coins in Circulation (Outside BNB Vaults)(BGN million)

Source: the BNB.

Recent years’ upward currency circulation trend continued in the first half-year, circu-lating banknotes numbering 395.8 million worth BGN 12,389.0 million. Compared with end-June 2015, their number rose by 20.4 million or 5.42 per cent, the total value in-creasing by BGN 1398.9 million or 12.73 per cent. Banknotes comprised 97.87 per cent of the total value of currency outside BNB vaults by 30 June 2016. By denomination, the shares of BGN 50 and BGN 100 banknotes grew faster, rising to 23.36 and 11.12 per cent. The BGN 20 and BGN 50 banknotes were most commonly used. In late June 121.2 million BGN 20 and 92.5 million BGN 50 banknotes circulated. BGN 20 banknotes com-prised 30.61 per cent of all circulating banknotes.

51 LBNB Article 2, paragraph 5 and Article 25.52 Banknotes and circulating and commemorative coins issued after 5 July 1999.

Banknotes and Coins in Circula-

tion (Outside BNB Vaults)

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Individual Denomination Shares in the Total Number of Circulating Banknotes

Note: The sum total may not add up to 100 per cent due to rounding.

Source: the BNB.

The BGN 50 banknote held the largest share in the structure of circulating banknotes. By end-June the value of BGN 50 banknotes was BGN 4623.4 million, occupying 37.33 per cent of all banknotes in circulation. BGN 100 and BGN 20 banknotes occu-pied 35.55 and 19.57 per cent shares.

The mean value of a circulating banknote on 30 June 2016 was BGN 31.29, up BGN 2.02 in a year due to more high value banknotes (BGN 100 and BGN 50).

In late June, 2001.1 million banknotes circulated, worth BGN 261.8 million. Circulat-ing coins outside BNB vaults grew by 163.5 million (8.90 per cent), their value ris-ing BGN 29.3 million or 12.61 per cent. By 30 June the share of circulating coins was 2.07 per cent of circulating currency value.

Individual Nominal Value Shares in the Total Number of Circulating Coins

Source: the BNB.

The long-term rising trend in the number of circulating coins continued. It reflected high growth in the number of lower nominal value coins and, to a lesser extent, BGN 1 coins. The largest absolute annual increase was in BGN 0.01 and BGN 0.02 coins (up 51.2 million and 43.7 million or 9.17 and 9.22 per cent). The number of BGN 1 coins

45

Currency in C

irculationcontinued growing, at 10.1 per cent over the period. By the close of June 4.1 million BGN 2 coins were in circulation.

Circulating BGN 0.01 coins had the greatest 30.45 per cent share of circulating coins. By value, BGN 1 coins held the highest share at 44.03 per cent.

By end-June the value of an average circulating coin was unchanged at BGN 0.13.

Three commemorative coins were circulated in the half-year: the 140 Years since the April Uprising silver commemorative coin with a nominal value of BGN 10, the 150 Years since the Birth of Pencho Slaveikov copper commemorative coin in the series Renowned Bulgarian Artists with a nominal value of BGN 2, and the 150 Years since the First Railroad in Bulgaria: Ruse–Varna silver commemorative coin with a nominal value of BGN 10. Commemorative coins outside BNB vaults were worth BGN 7.0 million, with their share comprising 0.06 per cent of currency in circulation.

Over the period the BNB retained 604 non-genuine Bulgarian banknotes which had en-tered into circulation. The share of all retained non-genuine banknotes remained very low at 0.000153 per cent of circulating banknotes by June 2016.

The BGN 20 banknote held the largest share of all non-genuine banknotes reported in the first half of 2016 at 69.21 per cent. Non-genuine BGN 20 banknotes comprised just 0.000345 per cent of the number of BGN 20 banknotes in circulation by the end of June. Non-genuine BGN 50 banknotes occupied 17.22 per cent and non-genuine BGN 10 banknotes 9.60 per cent. Non-genuine BGN 2, BGN 5, and BGN 100 banknotes num-bered 24 accounting for 3.97 per cent of all retained non-genuine banknotes.

Non-genuine Bulgarian coins numbered 451: 326 BGN 0.50, 111 BGN 1, and 14 BGN 2 coins. The share of retained non-genuine Bulgarian coins in the total number of circu-lating coins by 30 June 2016 was 0.000023 per cent.

In performing its statutory duty on expert assessment of foreign banknotes and coins retained in Bulgaria, in the first half of 2016 the Bank’s National Analysis Centre re-tained: 996 euro, 395 US dollar, and 266 diverse foreign non-genuine banknotes.

BNB issue and cash operations include: banknote printing; coin minting, accepting, de-livering, repaying, processing, authenticity and fitness checking of Bulgarian banknotes and coins, and foreign currency; exchanging damaged Bulgarian banknotes and coins; and scrapping unfit Bulgarian banknotes and coins.

Between January and June, 63.9 million newly printed banknotes and 95.6 million newly minted coins worth BGN 1748.3 million were supplied under contracts with producers. The BNB launched three new commemorative coins planned in its 2016 Minting Pro-gramme under Article 25, paragraph 1 of the LBNB.53

Banknote and coin deposits into and withdrawals from the BNB totalled BGN 16,028.4 million between January and June 2016. Circulating Bulgarian banknotes and coins de-posited with the BNB came to BGN 8047.5 million, down BGN 221.9 million or 2.68 per cent on the corresponding period of 2015. Withdrawals were BGN 7980.9 million, up BGN 68.4 million or 0.86 per cent.

Between January and June BNB and Cash Services Company sorting machines pro-cessed 442.2 million banknotes and 84.1 million coins. Compared with the same pe-riod of 2015, the number of processed banknotes decreased by 5.50 per cent, while that of processed circulating coins increased by 6.73 per cent. BGN 10 and BGN 20

53 See the BNB website for new banknote and circulating and commemorative coin issues.

Non-genuine Banknotes

and Circulat-ing Coins

BNB Issue and Cash

Operations

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banknotes and BGN 0.20, BGN 0.50 and BGN 1 coins were most often processed by nominal value.

Processing and fitness testing failed 37.0 million banknotes, up 2.0 million (5.64 per cent) on the same period of 2015. BGN 2, BGN 10, and BGN 20 banknotes held the largest shares of these at 23.21, 31.73 and 22.29 per cent.

Retained unfit coins numbered 657,200, down 57,600 or 8.06 per cent on the same period of 2015.

The BNB purchased EUR 0.39 million of reserve currency, including EUR 0.37 mil-lion from budget organisations and EUR 0.02 million from individuals. It sold EUR 24.3 million of reserve currency, including EUR 3.5 million to budget organisations and EUR 20.8 million to individuals.

The Bank conducted three full checks into credit institutions and one service provider to ensure observance of Ordinance No 18 on the Control over Quality of Banknotes and Coins in Currency Circulation and its enabling instruments. The BNB conducted spot on-site checks into credit institutions and service providers for authorising and testing 98 sorting machines and customer operated machines to Ordinance No 18 identifica-tion and fitness standards.

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VI. Maintaining Banking System Stability and Protecting Depositor Interests

1. State of the Banking System

In the first half of 2016 credit institutions operated in an environment of steadily grow-ing deposits and weak lending. The downward trend in expenditure on attracted funds continued. The reporting period coincided with the asset quality review (AQR) and the stress test (ST) of the Bulgarian banking system, completed with the publication of re-sults on 13 August.54

Banking sector and individual credit institution liquidity remained high, reflecting rising liquid assets and attracted funds. All banks preserved liquidity buffers and they were monitored on a daily basis. BNB precautionary measures to counteract external risks to Bulgaria’s banking system continued.

Credit risk continued to dominate other risks in the banking system balance sheet, which showed a decrease in the amount and level of non-performing exposures. The capital position of credit institutions remained strong, and capital adequacy ratios were significantly higher than regulatory requirements.55 The amount of common equity in all banks was sufficient to cover capital buffer requirements.

Banking system profitability indicators improved. Return on assets (ROA) and equity (ROE) remained above average EU levels.

Domestic and Foreign Bank Market Shares by Asset

Source: the BNB

The decrease in excess reserves and the consolidation of the balance sheets of Eurobank Bulgaria and Alpha Bank Bulgaria Branch prompted some changes to the balance sheet structure of the banking system in the first half of 2016.

Between January and June banking system assets rose BGN 1.1 billion (1.3 per cent) to BGN 88.7 billion.

54 The report with individual bank results from the AQR and ST was published on the BNB website on 13 August 2016. http://www.bnb.bg/PressOffice/POPressReleases/POPRDate/PR_20160813_EN

55 Based on financial and supervisory reports by 30 June 2016 which do not reflect AQR results. Assets totalling BGN 84.2 billion on 31 December 2015 were reviewed. Results suggest that the banking system remains well capi-talised: the common equity tier 1 ratio is 18.9 per cent, significantly over the regulatory minimum of 4.5 per cent. The capital adequacy ratio of all banks remained above the regulatory minimum.

http://www.bnb.bg/PressOffice/POPressReleases/POPRDate/PR_20160813_EN

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The five largest credit institutions held 57.6 per cent of this in the aggregated banking sector balance sheet. The market position of credit institutions with mainly Bulgarian equity posted an insignificant fall to 23.3 per cent in the first half-year, subsidiaries and EU bank branches recording a rise to 75.3 per cent, and non-EU banks and branches indicating a slight decrease.

Dynamics of Selected Balance Sheet Indicators (percentage changes per annum)

(per cent)

Source: the BNB.

Gross loans and advances56 totalled BGN 75.5 billion at the end of the half-year. Be-tween January and June claims on residents fell to 85.6 per cent (mainly due to a de-crease in BNB excess reserves), while the share of claims on non-residents rose to 14.4 per cent mostly through increased exposures to credit institutions. At the end of June the credit portfolio (except exposures on loans and advances to credit institutions and central banks) was BGN 53.7 billion after a first quarter fall (due also to portfolio sales) and some second quarter increase. Loans to non-financial corporations occu-pied the largest share at 61.2 per cent (BGN 32.9 billion) in the credit portfolio struc-ture followed by households (34.0 per cent or BGN 18.3 billion), other financial corpo-rations (3.7 per cent or BGN 2.0 billion), and the general government (1.1 per cent or BGN 0.6 billion).

By the end of the half-year banking system deposits reached BGN 75.2 billion from BGN 74.5 billion at the end of 2015.

56 Source: the BNB (Macroprudential Form 1).

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Residence Structure of Banking System Deposits, Total(per cent)

Source: the BNB.

The share of household resources rose to 60.1 per cent, and that of other financial cor-porations to 5.5 per cent at the expense of deposits from other financing sources. By the end of June 2016 deposits from non-financial corporations accounted for 26.1 per cent, from credit institutions for 5.9 per cent, and from general government for 2.4 per cent. Within the residence structure of deposits the share of domestic resources rose to 90.5 per cent, and that of non-residents fell to 9.5 per cent. The share of lev-denomi-nated and euro-denominated items in the currency composition of deposits rose to 54.2 and 37.0 per cent, while that of other currencies fell to 8.8 per cent.

Total banking system balance sheet equity rose 2.4 per cent to BGN 11.8 billion.

Structure of Non-performing Loans by Sector

Source: the BNB.

By the end of June 2016 banking system non-performing exposures totalled BGN 10.7 billion, including loans and advances of BGN 10.6 billion and securities of BGN 32 million. Non-performing loans fell BGN 529 million (4.7 per cent) mostly from claims on loans. Exposures past due over a year also fell, to BGN 6.5 billion by the end of June. The share of non-performing loans and debt securities in total gross banking exposures fell to 12.4 per cent.

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There was no major change in the structure of non-performing exposures. The share of banking system non-performing exposures to non-financial corporations increased at the expense of that to households accounting for 71.4 per cent at the end of the first half of 2016.

Net non-performing loans57 fell to BGN 5.4 billion and remained fully covered by capital exceeding the minimum regulatory requirement of 8 per cent (BGN 7.4 billion).

Balance sheet items other than loans retained good quality. In the first half-year the share of cash and cash balances with central banks and other demand deposits fell to 18.5 per cent of banking system assets, with a portion of cash balances with central banks being transformed into claims on credit institutions (mainly non-resident banks) and into securities portfolios. The shares of securities portfolios and loans and ad-vances rose from 12.8 to 14.3 per cent and from 61.6 to 62.2 per cent. Debt securities issued by residents increased to BGN 10.2 billion, and by non-residents to BGN 2.2 bil-lion. Investment into Bulgarian government bonds reached BGN 10 billion, forming the largest share in the structure of debt securities (81.3 per cent).

Banking system profitability remained good. Significantly higher financial results at most credit institutions reflect increased profits from financial assets available for sale.58 For the first six months of 2016 credit institutions generated BGN 773 million of profit, BGN 270 million more than in the same period last year. Most banks’ profits rose on June 2015, while losses and their dispersion among banks decreased.

Return on Assets and Return on Equity (per cent) (per cent)

Source: the BNB.

The upward trend in major banking system profitability indicators continued and ROA and ROE reached peak values for the last four quarters. ROA increased to 1.74 per cent from 1.20 per cent in June 2015. In a year ROE rose almost four percentage points to 13.11 per cent as financial result rose faster than balance sheet capital.

Net interest income rose BGN 45 million or 3.3 per cent on the corresponding period of 2015 to over BGN 1.4 billion by the end of June 2016. The significant decline in inter-est expenditure due to less expensive interest liabilities contributed to this. Net income

57 Gross loans less the amount of their impairment.58 After acquisition of Visa Europe by Visa Inc. profits from financial assets available for sale rose significantly compared

with June 2015.

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from fees and commissions picked up BGN 17 million to BGN 447 million compared with the first half of 2015.

Net Operating Income Structure (per cent)

Source: the BNB.

In a year net operating income rose BGN 141 million to BGN 2.1 billion at the end of the first half of 2016. Favourable net operating income and administrative expenditure trends helped improve banking system efficiency ratio to 42.60 per cent from 49.50 in June 2015).

Credit institutions’ capital adequacy ratios remained high and banks observed capi-tal buffer requirements (2.5 per cent capital conservation, 3 per cent systemic risk, and 0 per cent countercyclical capital buffer). By the end of June equity amounted to BGN 11.4 billion: a BGN 407 million or 3.7 per cent increase on 31 December 2015. The common equity tier one capital, the major component of tier one capital, rose to BGN 10.4 billion. Between January and June 2016 tier one capital rose to BGN 10.6 bil-lion and tier two capital fell to BGN 755 million. Tier one capital growth reflected rising retained earnings, other reserves and capital instruments eligible for common equity tier one.

Overall risk exposures rose BGN 637 million or 1.3 per cent on December 2015 due mainly to credit risk-weighted exposures rising BGN 497 million or 1.1 per cent. Expo-sures under the Standardised Approach, particularly the exposure classes to institu-tions, retail and other exposures contributed to growth. The share of credit risk-weighted exposures in total risk exposures changed little and was 88.7 per cent. There was no change in the share of exposures to position, currency, and commodity risk (1.5 per cent), while the share of exposures to operational risk rose slightly to 9.8 per cent.

Equity growing faster than risk exposures helped strengthen all banking system capital adequacy ratios. By the end of June total capital adequacy ratio was 22.72 per cent, with tier one capital at 21.21, and common equity tier one at 20.74 per cent.

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Selected Capital Indicators under Regulation (EU) No 575/2013 on Capital Requirements (per cent) (per cent)

Source: the BNB.

Leverage59 reached 11.18 per cent on 10.85 per cent on 31 December 2015. Faster growing tier one capital than total exposure helped this.

Banking system liquidity remained high. Between January and June liquid assets rose BGN 110 million, or 0.4 per cent to BGN 27.8 billion, or 31.4 per cent of banks’ assets. Banking system liquidity position reflected rising other financial corporation and house-hold deposits. Alongside this, high liquidity affected profitability. Lending dynamics was divergent. Second quarter gross credit portfolio growth (excluding loans and advances to central banks and credit institutions) did not offset the first quarter fall.

Selected Liquidity Indicators(BGN million) (per cent)

Source: the BNB.

59 Under Regulation (EU) No 575/2013 Article 429, leverage is expressed as the percentage of institutions’ capital (tier one capital) of total exposures. From 1 January 2015 institutions calculate leverage on the reporting reference date. A mandatory minimum requirement of 3 per cent leverage is expected to apply from 1 January 2018.

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In the first half of the year the liquid assets ratio ranged between 36.6 and 37.6 per cent, with 36.64 per cent at the end of June on 36.71 per cent six months earlier. This shows liabilities growing faster than liquid assets. Compared with the end of 2015 liabilities rose BGN 442 million or 0.6 per cent due mainly to increased resident deposits under the other than credit institutions items.

2. Financial Institutions Registered under Law on Credit Institutions Article 3a

By the end of June 2016 there were 173 financial institutions registered under Article 3a of the Law on Credit Institutions.

Overall banking assets rose 9.6 per cent to BGN 6.8 billion in the year to June 2016. At the close of the half-year period the share of the sector’s assets reached 7.7 per cent of total banking assets: a minor increase on 2015. The 20 largest financial institutions’ asset market share was 75.8 per cent.

Monitored business market shares suggest a general rise in lending and a drop in other business, including guarantee transactions and acquiring equity in banks and other fi-nancial institutions. In a year the sector’s net portfolio (credit and leasing) rose 14.8 per cent to BGN 5.7 billion. The gross credit portfolio also rose to BGN 6.1 billion. Foreign currency loans and receivables continued dropping from 49.5 to 42.8 per cent in a year, while lev loans and receivables rose. Claims on financial leasing (BGN 2.1 billion) were mostly in euro, however, and comprised 87.7 per cent of total claims on loans and fi-nancial leasing in euro.

Asset quality improved and gross impaired loans and claims on leasing fell from BGN 2.5 billion in June 2015 to BGN 1.8 billion. Consumer loans classified as past due remained holding a 20 per cent share of total classified claims. Overall funds attracted by the sector rose 8 per cent in a year to BGN 5 billion. Bank resources dominated funds by financing source despite a falling share: 74 per cent or BGN 3.7 billion in June 2016 from 77 per cent or BGN 3.5 billion a year earlier.

Financial institutions’ equity continued rising steadily to BGN 1.5 billion from BGN 1.3 billion a year earlier. The 20 largest companies’ equity accounted for 63 per cent of sector equity.

3. Banking Supervision

The asset quality review (AQR) of all 22 banks licensed by the BNB (excluding six foreign bank branches), was an important task in the first half-year. In the AQR, the BNB worked with an independent external consultant selected by public tender, and independent consultants and appraisers employed by the banks to a BNB approved uniform selection procedure. More than 900 experts across the BNB and the external independent parties were involved in the AQR. The European Commission and European Banking Authority (EBA) were informed and consulted throughout.

Total assets of BGN 84.2 billion as at 31 December 2015, or 96 per cent of the banking system assets were subject to asset quality review.

The AQR comprised ten blocks, eight of which finished in the first half of 2016: Pro-cesses, policies and accounting review; Loan data tape creation; Data integrity valida-tion; Credit file review; Collateral and real estate valuation; Credit file review results ex-trapolation; Collective provision analysis.

Asset Quality

Review and Stress Test

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The processes, policies and accounting review paid special attention to classifying ex-posures in risk groups, determining accounting provisions, identifying connected cus-tomers, assessing and managing real estate holdings, and adjusting credit valuations for derivatives.

The task addressed internal lending rules, deconsolidation and accounting policies, credit files, and assets at fair value. Meetings discussed credit risk assessment and collateral on risk exposures, and their effect on provisions. Asset measurement meth-ods by service providers were monitored for compliance with BNB guidelines. There were weekly progress reports on blocks.

Over 3400 individual credit files were reviewed, covering BGN 23.2 billion or 71 per cent of banks’ corporate and large SME loans. The AQR resulted in aggregate adjust-ments of BGN 665 million, or 1.3 per cent of risk weighted assets, to be reflected in the banks’ 2016 financial statements. The AQR-adjusted common equity tier one capital ratio for the banking system was 18.9 per cent by 31 December 2015. Though results vary by bank, after the AQR all banks’ capital adequacy remained above regulatory minima. Anticipated capital adjustments at set banks only affect capital buffers above regulatory capital adequacy minima. Relevant follow-up measures involved maintain-ing or restoring buffers.

The stress test (ST) of 22 banks was in July 2016 and assessed the resilience of each bank to hypothetical financial and macroeconomic shocks. The results confirm the strong capital position and resilience to tested shocks, though results vary by bank. The BNB published the AQR and ST results on 13 August.

In the first half of the year off-site supervision focused on continuous assessment of risks which credit institutions were, or might face. Off-site supervision supervisory re-views and assessments involved monitoring of key risk indicators, assessing institu-tions’ internal governance and control mechanisms, and assessing risk to capital and liquidity. Continuous monitoring of key indicators helped pinpoint changes in institu-tions’ financial state and risk profile.

Capital and liquidity adequacy were assessed quarterly and analysis also covered sig-nificant new developments in asset quality and profitability. Fifty four quarterly analyses assigned risk-based ratings reflecting major risk components at individual banks and bank branches. Ratings identify threats to institutions’ viability and assess the need for supervisory measures.

Work continued improving the quality of regular supervisory reporting, providing infor-mation for adequate assessment of banks’ risk profiles and data for the ECB and EBA. Surveys and error protocols generated by the single data repository (SDR) showed that reports completed by banks in the first half-year contained much fewer errors requir-ing correction and resubmission. The continuous dialogue with banks on data accuracy and verification contributed greatly to this.

Continuous monitoring of credit institutions also involved following up the implementa-tion of supervisory measures prescribed by orders following supervisory inspections. This involved a review of measures by three banks to bring their operations into line with regulatory requirements.60 The banks were asked for additional information which was reviewed and analysed monthly. Recommendations made in the course of inspec-tions were also followed up. They mainly addressed improvements to lending, credit

60 Removal of breaches of Regulation (EC) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 and under Im-plementing Regulation (EU) No 680/2014 according to Regulation (EU) No 575/2013 of the European Parliament and of the Council, the implementing technical standards with regard to provision of information by institutions to super-visory bodies, found in the course of on-site inspections.

Continuous Supervisory

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risk and credit portfolio concentrations assessment, monitoring, control, and manage-ment, supervisory reporting, and internal capital adequacy analyses.

Information exchange on European bank group subsidiaries among supervisory col-leges improved in the first half-year. Supervisory colleges conducted risk evaluations involving analyses of capital and liquidity positions, business models, corporate man-agement, and internal control mechanisms.

Work began on preparing a template and procedure for assessing the recovery plans of domestic banks which are not group subsidiaries and are subject to consolidated supervision under the Law on the Recovery and Resolution of Credit Institutions and Investment Firms Article 6 paragraph 1.

Alongside the AQR planned supervisory inspections checked whether and to what ex-tent recommendations for overall performance improvement following previous super-visory inspections were being implemented, and what their effect was. No breaches of regulations, technical standards, or guidelines were found. Inspections established that banks followed recommendations on improving lending and internal procedures, but not those on market risk management or limits on price and interest risk or approval of foreign exchange, securities, and derivative transactions. Many supervisory prescrip-tions on internal capital analysis and capital adequacy risk management were ignored.

Each inspection results in a report. Recommendations for corrective measures at two banks addressed: credit transaction monitoring and assessing and classifying risk ex-posures; internal capital adequacy analysis; long-term development strategies, ob-jectives, and implementation (including defining priority business areas and prod-uct ranges, serious risk mitigation limits, planned structural changes, and risk policy changes; market risk management through updating internal policies, managing op-erational risk and minimising losses from operational events by expanding the range of key risk indicators and improving reported operational event databases, and creating a single complaints register.

Significant changes to the internal credit risk measuring model planned by an interna-tional bank group with a Bulgarian subsidiary resulted in a documentation review and follow-up inspection. The inspection found that the changes planned would in fact result in insignificant changes to the risk management in the domestic subsidiary. Opinions were sent to the consolidating supervisor (the ECB) and the supervisor in charge of the bank group, to be taken into account in common decisions on each requested change.

Factors influencing banking system stability continued to be monitored in line with macroprudential supervision commitments. A set of various macroprudential instru-ments were employed for early identification of increased risk to system stability. Analy-ses and assessments continued giving rise to precautionary measures and macropru-dential recommendations to counteract external risks and avoid spillovers of instability from other financial systems. Daily monitoring of the liquidity positions of all credit in-stitutions continued.

Data on the increasing demand for analytical products continued to be collected for macroprudential supervision. The supervisory information service facilitated reliable in-formation exchange between the BNB and credit and financial institutions and provided data to external users and institutions with which the BNB liaises to agreed formats. Implementing Technical Standard changes were implemented. Additional information products were developed.

A significant part of BNB macroprudential work relates to the European Systemic Risk Board (ESRB) and its substructures. This supports implementation of BNB macropru-dential policy and helps expand Bank capacity in the area.

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Over the review period an expert analysis addressed the calibration of an anticyclical buffer to protect the banking system from potential losses from cyclical systemic risk accumulated in periods of excessive credit growth. The BNB based the framework for setting countercyclical buffer rates in Bulgaria on the methodology of the Basel Com-mittee on Banking Supervision, plus the specific BNB methodology on determining the broad definition of credit (both to domestic banks and obligations to non-residents).

Measures were launched on one of the requirements of Recommendation of the Euro-pean Systemic Risk Board of 11 December 2015 on recognising and setting counter-cyclical buffer rates for exposures to third countries (ESRB/2015/1). They were aimed at unifying policies of the EU countries on recognising and setting countercyclical buffer rates for exposures to third countries. This involves third countries to which EU Member States have material exposures.

The Specific Supervisory Activities Directorate worked within the new EU legal frame-work for safety systems protecting the banking sector against funds of a criminal na-ture. The Instruction for interaction between the Bulgarian National Bank and the DANS State Agency for National Security eased information exchange on the capital of finan-cial and credit institution owners and provided an additional environment for the risk-based approach in bank supervision.

Five stand alone credit institution inspections examined risk measurement and man-agement procedures and control mechanisms to prevent money laundering, adminis-trative capacity, and organisational culture. The 25 breaches found related mainly to high risk customers and operations but raised no serious supervisory concerns. Rec-ommendations addressed resource strengthening, improvement of documentation, and boosting follow up control.

Target on-site inspections checked compliance in data organisation and document presentation to depositors with new Law on Bank Deposit Guarantee and Law on Credit Institutions depositor information disclosure provisions. Recommendations were to make deposit product terms and conditions more transparent. An assessment of sev-eral banks’ customer dispute procedures and practice showed that specialised units handle claims in line with internal rules applying best European practice.

A joint inspection with the Financial Supervision Commission at a bank acting as sup-plementary pension insurance fund custodian showed legal observance.

Work continued with the Ministry of Foreign Affairs and the DANS State National Secu-rity Agency on restrictive measures as defined by EU and UN Security Council acts.

Amid renewed EU debate and Bulgarian commitments on making financial transac-tions and corporate structures more transparent and counteracting terrorist financing, a joint working party including BNB representatives continued rapid transposing of Directive (EU) 2015/849 of the European Parliament and of the Council on the preven-tion of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Directive 2006/70/EC of the Commission into national legislation and de-veloping a national risk assessment methodology.

The EBA Consumer Protection and Financial Innovation Committee published Guide-lines on product oversight and governance arrangements for retail banking products to be applied from 3 January 2017.

In the first half of 2016 the number of financial institutions under the Law on Credit In-stitutions Article 3а rose by 12, one operating under passporting procedures following notification under Law on Credit Institutions Article 24. Three financial institutions were

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deleted over the review period. Two companies were denied registration because of in-sufficient capital and own funds and missing information on real owners.

The review of complaints from financial institutions’ customers outlined inappropriate personal data protection systems as a major issue. Legal authorities were referred in cases of personal data misuse. The BNB imposed a pecuniary penalty on one financial institution due to ineffective control systems.

There were no new bank operations licences or new credit institution licensing procedures.

In March preapproval for the transfer of Alpha Bank – Bulgaria Branch to Eurobank Bul-garia AD with full succession to the latter was completed.

Over the review period the BNB granted preapproval for 4Finance Holding S.A., Luxembourg to indirectly acquire all 81,600,000 equity shares in TBI Bank by acquiring all shares in sole owner TBIF Financial Services BV.

UniCredit Group S.p.A restructuring involved a procedure for considering a UniCredit request for preapproval for direct acquisition of a UniCredit Bank Austria AG, Austria share representing 99.45 per cent of UniCredit Bulbank AD, Bulgaria’s equity.61 Three banks were allowed to include increased equity shares into common equity tier one, and a bank was allowed to include its annual profit into common equity tier one.

Procedures opened on requests by four banks for early repayment of obligations on instruments in tier two capital and an instrument in additional tier one capital. The BNB allowed early repayment of obligations62 to three of the banks, instructing another bank to discontinue treating a subordinated loan agreement as a tier two capital regulatory instrument.63

In the first half of 2016 seven credit institutions were subject to supervisory measures. One bank was required to increase its capital. The increase was consequently recog-nised as an element of common equity tier one. The BNB instructed one bank to bring its business into line with the Law on Measures against Money Laundering. Another bank was instructed to bring a particular exposure into line with statutory regulators.

Recommendations were addressed to four banks. One was asked to improve its sce-narios for measuring interest rate risk in line with Basel Committee on Banking Supervi-sion recommendations. This bank was also asked to bring customer identification into line with the Law on Measures against Money Laundering. Another bank was asked to revise internal rules in line with the regulatory framework and convene a risk committee as provided in BNB Ordinance No 7 on Organisation and Risk Management of Banks. The bank was instructed to apply the Guidelines on the Management of Interest Rate Risk in the Banking Book methodology.

Another credit institution was recommended to remedy operational weaknesses in its sensitivity to market and operational risks found during an on-site inspection, and at-tracting deposits and other repayable funds in another EU member state. The bank was required to amplify its stress tests with additional scenarios for measuring interest rate, operational, and outsourcing risk.

A bank was asked to remove operational weaknesses found during an on-site super-visory inspection. The BNB instructed it to revise and amplify its existing centralised credit procedures and involve its risk management unit more actively in credit transac-tion oversight and monitoring. Recommendations also addressed inadequate impair-ment of exposures in the problem credit book. Measure stemming from the AQR will

61 The prior approval was granted by the BNB in Order No BNB-77023 of 18 August 2016.62 Two of these approvals were granted in August 2016.63 The instruction was promulgated in August 2016,

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address revising the bank’s risk exposures classification and impairment loss reporting policy of, and advising the BNB of accrued impairment on problem risk exposures and the outcome of interest sensitivity stress tests. Other recommendations involved sup-plementing the bank’s market risk management rules with market risk measuring and evaluation methods and principles, changing its stress tests methodology, and using various evaluation scenarios to measure the effect of hedge transactions, the fair value of derivative instruments, and restrictions on similar instruments.

There were management changes at: UniCredit Bulbank (a new management board member), Texim Bank (three new supervisory board members), DSK Bank (a new su-pervisory board member), ProCredit Bank (Bulgaria) (a new supervisory board mem-ber), T.C. Ziraat Bankası, Sofia Branch (a new branch manager), International Asset Bank (a new supervisory board member), Piraeus Bank Bulgaria (a new board of direc-tors member).

Ten new EU member state credit institutions exercised the freedom to provide services under the mutual recognition of passporting procedures through notice of intent to pro-vide cross-border bank services in Bulgaria to the BNB from bank operation licensing supervisors. The BNB received 264 notices of direct services in Bulgaria.

The BNB Banking Supervision Department also handles complaints from bank custom-ers and financial institutions. Where complaints stem from property disputes arising from contractual relations, the BNB refers them to relevant banks or financial institutions or the Courts. Where complaints are within the purview of other institutions (the Con-sumer Protection Commission, the Financial Supervision Commission, or legal authori-ties), the BNB advises complainants of that. In cases of poor customer relations, banks concerned were asked to remove the weaknesses.

On 3 February 2015 the Council of Ministers presented the Draft Law on Real Estate Loans for Consumers before the National Assembly. BNB representatives helped draft it. After a number of key issues had been debated in parliamentary committees, it was adopted at the second reading on 14 July 2016, transposing into Bulgarian leg-islation Directive 2014/17/EU of the European Parliament and of the Council on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010. The Law provides protection to consumers, creditors, and credit intermediaries and promotes responsible and safer lending and market confidence, boosting financial stability. Ordi-nance No 8121z-444 of 3 May 2016 on the Organisation and Control for Ensuring Bank and Financial Institution Security64 issued by Ministry of Interior and the BNB was prom-ulgated. The Ordinance was drafted by a joint BNB and Ministry of the Interior work-ing party under the Law on Credit Institutions Additional Provisions § 3. Compared with past provisions, the limits on money and valuables are revised for First, Second and Third Category establishments. The new provisions require the Category Three estab-lishments to have remote alarm systems linked to centralised monitoring stations, and for secure money and valuables transportation to Ordinance No I-121 2004 on the Pro-cedures for Secure Valuable Package Transport.

With regard to common equity tier one issue reviews, a simulation assessed the ef-fect of the change in the composition and amount of equity on regulatory capital in re-sponse to banks’ requests for early repayment of capital instruments and inclusion of annual profit in the regulatory capital. Alongside meetings, coordination, and replies to EBA questionnaires, current questions and replies to banks, and internal supervisory training, instructions to banks for conducting internal analyses of liquidity and instruc-tions to banks on Ordinance No 30 on the Calculation of the Premium Contributions Due by Banks under the Law on Bank Deposit Guarantee issued by the BNB.

64 Darjaven Vestnik, Issue 37 of 17 May 2016.

Regulatory Framework

Activity

59

BN

B A

ctivity on Resolution of C

redit Institutions

VII. BNB Activity on Resolution of Credit Institutions

The Law on the Recovery and Resolution of Credit Institutions and Investment Firms in force from 14 August 2015 charges the BNB with bank resolution. In the first half of 2016 operational work built an infrastructure for data collection from credit institu-tions for the purpose of determining critical functions65 and preparing resolution plans. Standardised sample forms for resolution plans were prepared based on resolution planning by the EBA and the Single Resolution Board, adjusted to national legislation and bank practice.

Work focused on identifying bank balance sheet liabilities structures of and critical functions. This involved reviewing banks’ most recent annual financial statements and capital adequacy internal analyses. Projects also ran various scenarios which might cause resolution of banks.

Most of the largest of the 22 banks licensed by the BNB are subsidiaries of EU cross-border banking groups and own funds and eligible liabilities requirements for them are expected to be discussed at resolution colleges established for the relevant banking groups. In April 2016 the BNB concluded an agreement for cooperation and proce-dures for resolution college functioning with a Member State central bank, which is the resolution authority for a cross border banking group. In June cooperation agreements were concluded with regard to newly established international colleges for resolution of cross-border banking groups operating in Bulgaria through subsidiaries for which the Single Resolution Board is the group-level resolution authority.

Domestic banks operating abroad, for which the BNB is the group level resolution au-thority, conduct minor operations through branches in EU Member States and subsidi-aries in third countries. No resolution colleges for these banking groups are therefore projected.

Under the Law on the Recovery and Resolution of Credit Institutions and Investment Firms, in March the Governing Council of the BNB set the banking system contribution to the Bank Resolution Fund (BRF) for 2016 at BGN 95,687,000. This was apportioned to banks in April 2016 according to a methodology approved by the BNB Governing Council for determining individual contributions of banks to the BRF. All banks paid their contributions within a month of the decision.

65 Under Directive 2014/59/EU of the European Parliament and of the Council establishing a framework for the recov-ery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Di-rectives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012 of the European Parliament and of the Council Article 2 Paragraph 1, item 35 ‘critical functions’ means activities, services or operations the discontinuance of which is likely in one or more Member States, to lead to the disruption of services that are essential to the real economy or to dis-rupt financial stability due to the size, market share, external and internal interconnectedness, complexity or cross-border activities of an institution or group, with particular regard to the substitutability of those activities, services or operations.

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VIII. The Central Credit Register

The Bulgarian National Bank maintains an information system on customer debt to Bul-garian banks, financial institutions, and payment and electronic money institutions (re-porting units). BNB Ordinance No 22 on the Central Credit Register regulates the terms, procedure, and information flows to and from the Central Credit Register (CCR). The Register ensures centralised collection and access to information by reporting units and BNB use of that information. After amendments to Article 56 of the Law on Credit Institutions Ordinance No 2266 now covers participants in the CCR information system who provide guarantee transactions and acquire credit claims and other form of financ-ing (excluding factoring and forfaiting on commercial receivables). There were prepa-rations to update and improve the CCR information system. Improvements will address data submission and reporting by system participants.

By 30 June 2016 the CCR had 192 participants: 29 banks, 161 financial institutions, and two payment institutions. Twenty three new financial institutions joined the CCR in-formation system in the half-year, including 10 financial institutions providing guarantee transactions and acquiring credit claims and other forms of financing (excluding factor-ing and forfaiting on commercial receivables).

As a result of the increased number of participants, on 30 June 2016 loans registered in the CCR were 4,800,000 (3,976,000 in June 2015), and their balance sheet expo-sure was BGN 66,691 million (BGN 63,584 million in June 2015). Borrowers numbered 2,294,000, of whom 2,188,000 individuals; 94,000 legal entities, 5000 undomiciled for-eigners, and 7000 self-employed people.

Individuals (64.3 per cent) mostly owed up to BGN 5000, while legal entities mostly owed BGN 5000 to 50,000 (36.7 per cent).

CCR Searches in the First Halves of 2015 and 2016(number)

Source: the BNB.

66 Darjaven Vestnik issue 93 of 1 December 2015.

61

The Central C

redit R

egister

CCR information is an important indicator in assessing borrower creditworthiness. Real time customer debt information includes loan status, arrears, and repaid loans for five years back, plus borrower histories. Historical data raise bank and financial institution awareness by improving better credit risk analysis and assessment.

In the first half of 2016 banks, financial institutions, payment institutions and elec-tronic money institutions conducted 3,332,000 searches on 2,705,000 individuals and 627,000 legal entities. The average monthly number of searches was 555,000.

Ordinance No 22 Articles 21 and 22 grant individuals (including deceased persons’ heirs) and legal entities access to debt information. There were 6564 applications for CCR disclosures: 6451 by individuals and 113 by legal entities.

CCR Statement Applications in the First Halves of 2015 and 2016(number)

Source: the BNB.

The Law on Credit Institutions Chapter Eight Bank and Professional Secrecy allows the BNB to disclose information to judicial and government authorities.

The CCR develops and improves to match changing Bulgarian and world lending crite-ria. To boost data quality and reliability, incoming information is constantly analysed and the Register changed and improved. This offers reporting units more detail on existing and potential customer debt and more accurate assessment of credit risk.

The CCR works with partner ESCB credit registers to improve its technological and methodological performance. CCR organisation and function take into account best ESCB credit register practice and cooperates with the World Bank (under the Doing Business project), the ECB, the IMF (Access to and Use of Financial Services survey) and other international bodies by providing research, statistical analysis and annual information.

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IX. The Fiscal Agent and State Depository Function

Information Service

The Bulgarian National Bank acts as the fiscal agent and official depository of the state pursuant to the Law on the BNB. Under contracts negotiated to market conditions and prices with the Ministry of Finance, the BNB collects and submits information on budget entities’ domestic bank accounts to the Ministry of Finance and acts as government debt agent.

These duties call for continuing improvement of the GSAS system for conducting govern-ment securities auctions; the ESROT electronic system for registering and servicing gov-ernment securities trading; the GSSS government securities settlement system; the Reg-ister of Special Pledges; the AS ROAD automated system for registering and servicing external debt and the IOBFR system for budget and fiscal reserve information servicing.

Revenue raised in the first half-year by system participants under the Tariff of Fees and Commissions Charged on Processing Government Securities Transactions and by the MF under LBNB Article 43 was BGN 1,004,800 against BGN 799,800 a year ago.

Servicing state budget information under the MF contract involved submitting daily and periodical statements on budget entities’ (municipalities included) budget, extra budgetary, EU funds, deposit, foreign currency, and letter of credit lev and foreign cur-rency accounts at the BNB and other Bulgarian banks via IOBFR. The BNB, on behalf of the Ministry of Finance, also monitored security pledged by banks under the Public Finance Law and the 2016 State Budget Law, tallying it with reported balances daily.

On 30 June 20 banks (the BNB included) serviced budget funds with IOBFR access. Summarised information sets the overall balance of budget entities’ accounts (includ-ing the central budget) at BGN 13,681.0 million,67 up 10.8 per cent on 30 June 2015. By the end of June some 89 per cent (BGN 12,198.6 million) was in BNB accounts and the rest with other domestic banks.

Budget Entities’ Accounts with Domestic Banks (Excluding the BNB)(BGN million)

Source: the BNB.

67 Foreign currency account balances are recalculated in levs at the BNB exchange rate on 30 June 2016.

63

The Fiscal Ag

ent and S

tate Dep

ository FunctionBudget entities’ account balances outside the central bank fell 39.0 per cent on June 2015. As in previous years, five banks held over 70 per cent of these balances.

Approximately 92 per cent of budget funds at the BNB and other domestic banks formed the fiscal reserve’s liquidity portion68: BGN 12,604.3 million on 30 June. Of this, BGN 6178.9 million was allocated to earmarked funds: the State Fund for Guaranteeing the Stability of the State Pension System (the Silver Fund), the MF National Fund, the Agricultural State Fund Disbursement Agency, and the Teachers’ Pension Fund.

Structure of Bank Account Balances within the Fiscal Reserve Scope(BGN million)

Source: the BNB.

BNB duties to the MF and standing joint instructions by the Minister of Finance and the BNB Governor involved preparing 486 statistical budget reporting forms, including 149 on fiscal reserve account balances.

The AS ROAD system maintains up-to-date information on the government’s foreign financial obligations on which the Bank is calculating and paying agent.69 After MF advice, new issues of global bonds worth EUR 1994 million with seven and 12-year maturities were registered. Upon MF approval, repayments of EUR 129.3 million were made,70 comprising EUR 40.3 million principal and EUR 88.9 million interest. Reflect-ing new loans and repayments reported by 30 June, the total amount of obligations in AS ROAD reached EUR 8947.8 million,71 up EUR 1980.5 million on the prior year. In structural terms, euro-denominated debt continued holding the largest relative share at 99.9 per cent.

68 The Law on Public Finance Additional Provisions § 1, item 41 defines the fiscal reserve as comprising the balances of all budget entities’ bank accounts (excluding municipalities and their budget spending units) and other assets and claims on EU funds.

69 Under the government debt agency agreement between the BNB and MF.70 The payments total was recalculated in euro at the BNB rate for 30 June 2016.71 Total debt is recalculated in euro at the official BNB exchange rate for 30 June 2016.

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MF issuing policy involved three auctions for BGN-denominated government securities via the GSAS system. They offered one medium and one long-term issues. The aver-age weighted residual term to maturity of sold issues was seven years and five months.

Average Annual Yield Attained at the Auctions for Sale of Domestic Government Securities in the First Half of 2016

(per cent)

Note: There were no government securities auctions in March, April, and June 2016.

Source: the BNB.

As last year, the nominal value of government securities offered for sale was BGN 500 million. Over 79 per cent of bids were by banks (BGN 634.9 million) with BGN 164.4 million by non-bank institutions. Some private pension funds were among the most active non-bank institutions, making 7.2 per cent of bids, followed by the Na-tional Insurance Institute (the NOI) at 5.7, investment intermediaries at 3 per cent, in-surance corporations at 2.1 per cent, contractual and other funds at 1.6 per cent, and Employees’ Pay Guarantee Fund to the NOI at 1 per cent. Government bond sales volume was BGN 500 million, or 100 per cent of the scheduled volume. Almost three quarters of all sold bonds were acquired by banks: primary72 and non-primary dealers. The average annual yield of three-year and 10.5-year issues was 0.4 and 2.5 per cent, respectively.

ESROT registered BGN 988.3 million of corporate event payments on behalf and for the account of the issuer, up BGN 679.1 million on the same period last year.73 The 28 circu-lating MF issues had an overall nominal value of BGN 6927.5 million, or 18.8 per cent less than in June 2015.74 The bond issue currency structure was sustained, with BGN-denominated issues redeemable in levs occupying the largest share of 76.9 per cent, followed by EUR-denominated issues redeemable in euro of 21.7 per cent. EUR and USD-denominated issues redeemable in levs occupied 1.4 per cent. The maturity struc-ture changed with only medium and long-term issues remaining in circulation, in con-trast with the end of 2015 when 24.2 per cent of circulating issues had maturities of up to a year.

72 There were twelve MF and BNB Ordinance No 15 primary dealers. 73 The lev equivalent of payments on foreign currency denominated government securities issues was calculated at the

BNB rate on the date of payment.74 The lev equivalent of government securities denominated in foreign currency is calculated at the BNB rate for

30 June 2016. The total was reduced by the amount of government securities removed from the MF register/accounts on instructions from the title holder and transferred to the disposition of the Minister of Finance under the Law on Public Finance Article 152, paragraph 9.

Servicing Government

Securities Trading

65

The Fiscal Ag

ent and S

tate Dep

ository FunctionVolume of Transactions in Tradable Government Securities in the First Six Months

(BGN million)

Source: the BNB.

The total nominal volume of ESROT transactions was BGN 8769.5 million, down 31.7 per cent on the same period of 2015. Repo transactions had the largest share at 74 per cent, including those concluded for a period of one day (59.3 per cent), mostly in lev-denominated government securities. The average weighted annual yield of repo agree-ments in all maturities posted a decrease, moving between zero and -0.10 per cent compared to 0.01 to 0.66 per cent in the same period of 2015. Four to seven-day trans-action yields fluctuated more significantly.

Bond sales and purchases were BGN 2047.6 million. Of this, transactions between ESROT participants came to BGN 752.6 million, those between participants and cus-tomers were BGN 1295 million and between ESROT participants’ customers BGN 246.6 million.75 This segment occupied 26 per cent of the market, decreasing 50 per cent on the last half-year. Securities traded across the entire yield curve, with BGN and EUR-denominated bonds redeemable in levs with residual terms to maturity of about five years being most liquid. Average annual yield of the long-term benchmark issue (with a maturity of ten years and six months) moved within the narrow band of 2.44 per cent in January to 2.40 per cent in June, unlike the previous year (from 2.95 per cent in Janu-ary to 2.36 per cent in June). Secondary market liquidity ratio76 was 1.3 from 1.5 a year ago. ESROT participants encountered no problems and provided government bonds and cash in levs and euro for the delivery versus payment (DvP) settlement of govern-ment securities transactions, the average settlement ratio being 100 per cent.77

Over the reporting period blocking and unblocking operations in domestic govern-ment securities registered in ESROT and related to securing funds in budget entities’ bank accounts and on registered pledges under the Law on Special Pledges totalled BGN 1757.9 million against BGN 7198.1 million in the same period of 2015.

75 ESROT does not register transactions between customers of the same participant. 76 Liquidity ratio is the ratio between the volume of secondary market government bond transactions concluded over a

period and the volume of circulating government securities by that period’s end.77 Settlement ratio is the ratio of the number of transactions settled on the set date to all transactions subject to regis-

tration and settlement within the system for the reporting period.

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Holders of Government Securities Issued in the Domestic Market

Source: the BNB.

As circulating domestic market government securities decreased, the half-year saw an-nual declines in government securities investment by all bond holder categories. More significant declines were reported by banks (BGN 1159.6 million) followed by insurance corporations and pension funds (BGN 268.5 million). This changed individual govern-ment bond holder category exposures by 30 June 2016: 66 per cent with banks; 24 per cent with insurance corporations and pension funds, 9 per cent with non-bank financial institutions, corporations and individuals, and 1 per cent with foreign investors (com-pared to 68, 22, 8 and 2 per cent on 30 June 2015).

Over the review period the ESROT offered 99.9 per cent availability,78 with no call for contingency rules for interaction between systems operated by the BNB. The system had 28 participants by the end of the half-year: 25 banks, an international central secu-rities depository, the Reserve Collateral Pool, and the Ministry of Finance.

On 30 June 2016 there were 1192 accounts in the government securities settlement system under BNB Ordinance No 31 on Government Securities Settlement. Of them, 28 were for government securities of the issuer (the MF), 491 for participants’ own government securities portfolios, 296 for encumbered bonds, and 377 held by partici-pants’ customers. Account nominals tallied with the amount of outstanding issues at BGN 6927.5 million.79

The MF and market participants agreed to continue implementing the direct link be-tween the E-bond system and the BNB Government Securities Depository to meet Dele-gated Regulation (EU) 2015/61 parameters and criteria on organised government bond trading areas, including Bloomberg Professional’s E-Bond platform and the Bulgarian Stock Exchange Sofia AD. ESROT business requirements and development specifica-tions were finalised in line with the deadline agreed with the MF. Primary bond dealers were consulted on a joint BNB and MF project on E-bond trading rules.

78 The ratio of time when the system is operational to scheduled operating time. 79 The lev equivalence of government securities issues denominated in foreign currency is shown at the BNB rate for

30 June 2016.

System Development

67

Particip

ating in the E

SC

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EU

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ies

X. Participating in the ESCB and EU Bodies

In the first half of 2016 EU bodies and institutions continued efforts to recover economic growth, promote investment, establish a well-functioning and integrated capital market union and raise trust in the financial system. The Five Presidents’ report,80 Completing Europe’s Economic and Monetary Union, published in 2015, outlined the milestones to Economic and Monetary Union. In line with this, in November 2015 the EC presented a legislative proposal to create a European Deposit Insurance Scheme and a European Deposit Guarantee Fund together with initiatives to complete euro area Banking Union. In June 2016 the Ecofin Council adopted a road map for completing Banking Union, including measures to curb financial system risks and elaborate the rules applicable to the resolution of financial institutions.

The BNB Governor sits on the ECB General Council with EU central bank governors and the ECB President and Vice President. In the first half of 2016 the two sessions of the ECB General Council focused on issues related to the economic development and EU financial sector performance, the ECB report on the economic outlook and mon-etary policies of non-euro area Member States, and the report on compliance with the ban on monetary financing by central banks81. In the beginning of June the ECB Gen-eral Council also approved the 2016 Convergence Report assessing the degree of economic convergence between Member States which have not adopted the euro and compliance between their legislations and the Treaties.

BNB representatives took part in 12 ESCB committees82, 43 working groups, and the Human Resource Conference. Through representatives in ESCB bodies, committees and working groups, the Bank helped elaborate ECB legal instruments on monetary and banking policy, payment and settlement systems, statistical reporting and re-search, and other central banking issues. The Bank also took part in formulating ECB opinions on written consultations between EU Member States and the ECB on all legal draft legislative proposals within its purview.

The BNB Governor sits on the General Council of the European Systemic Risk Board (ESRB). Over the half-year the two General Council sessions focused on assessing risks to EU financial system stability stemming from the continued deterioration of banks and insurance funds’ balance sheets, global risk premia reversal amplified by low market liquidity, and growing concerns about public and non-financial sector debt on a back-ground of heightened uncertainty and low nominal growth. The General Council con-tinued debating macroprudential and structural issues in a low interest environment to identify where macroprudential policies need to be implemented. Reviewing and evalu-ating risks related to the unregulated banking sector, investment funds, and companies engaged in market maintenance (market makers) formed an accent in ESRB work. The General Council approved the adverse scenarios for the stress tests of banks, insur-

80 European Commission President Jean-Claude Juncker, in close collaboration with Euro Summit President Donald Tusk, Eurogroup President Jeroen Dijsselbloem, European Central Bank President Mario Draghi, and European Par-liament President Martin Schulz.

81 Report on central bank compliance with the prohibitions specified in Articles 123 and 124 of the Treaty on the Func-tioning of the European Union.

82 The Accounting and Monetary Income Committee (AMICO), the Financial Stability Committee (FSC), the Banknotes Committee (BANCO), the Eurosystem/ESCB Communications Committee (ECCO), the Information Technology Com-mittee (ITC), the Internal Auditors’ Committee (IAC), the International Relations Committee (IRC), the Legal Committee (LEGCO), the Market Operations Committee (MOC), the Monetary Policy Committee (MPC), the Market Infrastructure and Payments Committee (MIPC), the Statistics Committee (STC).

The European System of

Central Banks

The European Systemic

Risk Board, European

Banking Authority,

Colleges of Supervisors

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ance companies and central counterparties coordinated by the EBA, European Insur-ance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority. In line with the 2012 ESRB Recommendation on the Funding of Credit Institutions, the BNB reported to the ESRB on effective action to monitor and assess risks from encumbered assets. Also in late June, the Bank reported on the response to the 2014 ESRB Recommendation on guidance for setting countercyclical buffer rates.

Bank representatives were actively involved in the work of the ESRB General Council, Advisory Technical Committee, two working groups, and task forces and prepared posi-tions on topics discussed at meetings, written procedures, and consultations. Regular business included participating in the quarterly ESRB survey aimed at identifying risks to financial stability. Over the half-year the risk of continuous deterioration in profitability and the quality of banking system assets related to corporate indebtedness, and the risks stemming from the uncertain political and economic situation in Greece were of highest relevance to Bulgaria.

Results of the assessment of the degree of fulfilment of Recommendation ESRB/2012/2 on the funding of credit Institutions as regards pledged bank assets arrived in June. Data analysis confirmed that the banking system had pledged an insignificant share of assets, some 60 per cent of them government securities pledged as collateral for budget funds. Assessment of the degree of Bulgarian implementation of Recommenda-tion Part C(1) was raised to the highest possible of full compliance.

Between January and June 2016 information exchange among colleges of supervisors on subsidiaries representing parts of European bank groups intensified. Supervisory colleges conducted risk evaluations including analyses of capital and liquidity posi-tions, business models, corporate management, and internal control mechanisms. BNB representatives attended an ECB workshop on the intragroup transformation process and the direct acquisition of Central and Eastern Europe subsidiaries, including Uni-credit Bulbank AD by Unicredit S.p.A. of Italy. Information exchange on the recovery plans of individual groups also intensified.

Bank experts participated in a working meeting and teleconferences held by the reso-lution colleges, where the BNB participated as a group level resolution authority under Directive 2014/59/EU for the Recovery and Resolution of Credit Institutions and Invest-ment Firms.

In the first half of 2016 Banking Supervision Department experts attended an EBA workshop on assessing BNB implementation of supervisory review procedures and methodologies and participation in the supervisory colleges of European bank group subsidiaries under EBA Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP)83.

In the first six months of 2016 EU negotiations continued on preparations for the regula-tory framework of the third Banking Union building block: the European Deposit Insur-ance Scheme (EDIS), which is the next step to boosting EU financial system security and transparency. BNB experts participate in the EU Council ad hoc working group on strengthening Banking Union, where Bulgaria supports further integration. A major stress in the position was EDIS establishment as a long-term measure, with progress on curbing financial system risk made either before or simultaneously with EDIS launch.

In May 2016 the EU Council agreed on the final text of the draft Regulation on indices used as benchmarks84. The Regulation aims to establish a common European frame-

83 https://www.eba.europa.eu/documents/10180/935249/EBA-GL-2014-13+(Guidelines+on+SREP+methodologies+and+processes).pdf

84 Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as bench-marks in financial instruments and financial contracts or to measure the performance of investment funds and amend-ing Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (ОJ, L 171/1 of 29 June 2016).

The European Council, Ecofin

Council and Economic

and Financial Committee

(EFC)

69

Particip

ating in the E

SC

B and

EU

Bod

ieswork on reliable and correct benchmarks to reference financial instruments or financial contracts, or measure EU investment fund performance. The BNB’s constructive negoti-ating stance contributed to specific provisions tailored to the Bulgarian financial instru-ments and contracts market.

In the first half of 2016 the Bank continued to work intensively on harmonising national legislation with European requirements. BNB experts were involved in drafting a law to transpose the requirements of the Directive on the comparability of fees related to pay-ment accounts, payment account switching and access to payment accounts with ba-sic features85 and certain measures for implementing Regulation on interchange fees for card-based payment transactions86 in the Law on Payment Services and Payment Systems.

In the first six months of 2016 the BNB, in line with its competence, was involved in drafting a law on real estate loans for consumers transposing the requirements of Direc-tive 2014/17/EU on credit agreements for consumers relating to residential immovable property87. The objective of the draft law is to establish a regulatory framework in mort-gage lending and its scope covers two major categories: loans secured by mortgages on immovable property and loans to acquire or retain property rights on such prop-erty. The law names the BNB competent national authority on observance of the level of knowledge and competence of credit institution and credit intermediary personnel; customers creditworthiness assessment, creditor and credit intermediary remuneration policies, and registering credit intermediaries.

The BNB worked actively in the Economic and Financial Committee. Debate focused on reviewing the economic situation, risks to financial stability, and EU financial sector trends. The Committee monitored implementation of measures towards Banking Un-ion and discussed complementary measures to strengthen the Union by reducing and sharing risks. The Committee and an Informal Ecofin meeting discussed the regulatory treatment of sovereign exposures which helped prepare the EU position on this topic for debate in the Basel Committee on Banking Supervision. Major topics also included EC proposals to improve existing fiscal rules framework clarity and reduce its com-plexity, establish national Competitiveness Boards, and introduce unified euro area representation in international organisations and the IMF in particular. The Committee addressed the surveillance of Member States’ fiscal and macroeconomic policies in the context of the fifth European Semester. Also discussed were issues of international financial institution reform.

85 Directive 2014/92/EU of the European Parliament and of the Council of 23 July 2014 on the comparability of fees re-lated to payment accounts, payment account switching and access to payment accounts with basic features (OJ, L 257/214 of 28 August 2014). See also Chapter III.

86 Regulation (EU) No 2015/751 of the European Parliament and of the Council of 29 April 2015 on interchange fees for card-based payment transactions (OJ, L 123/1 of 19 May 2015).

87 Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010.

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The Law on the Bulgarian National Bank entitles the Bank to participate in international organisations furthering currency, monetary, and credit policy cooperation. Where Bul-garia participates in international financial institutions, the BNB is government fiscal agent and depository.

The Bulgarian National Bank holds equity in the Bank for International Settlements (BIS). The BNB Governor sat on BIS central bank governors’ regular bimonthly meet-ings: a major forum for cooperation and debate on world economic development and prospects and international financial markets. At the Annual General Shareholder Meet-ing in late June 2016, where the BIS Governors allocated net profit, the BNB received EUR 2.2 million of dividend for its 8000 BIS shares.

The Governor represents Bulgaria on the IMF Board of Governors.

On 22 February 2016 Bulgaria paid its increased IMF 14th General Quota Review quota. The increase was SDR 256.1 million of the SDR 896.3 million new quota. The quota in-crease gave Bulgaria 10,427 voting shares (from 6652) and represents 0.21 per cent of all IMF members’ voting shares.

In April the BNB Governor led a Bulgarian delegation to the regular IMF and World Bank Group spring meetings and took the opportunity to expand and deepen contacts with the international financial institutions’ management and financial executives.

On 30 June 2016 Bulgaria contributed to the International Bank for Reconstruction and Development’s equity rise and acquired 1393 shares worth USD 10,082,673.30.

In March 2016 the BNB Governing Council contributed USD 10,000 to the Group of Thirty.

Helping step up regional cooperation, the Bank also participated at summit level in the Central Banks Governors’ Club of Central Asia, Black Sea Region and Balkan Countries.

XI. International Relations

71

Statistics XII. Statistics

The BNB collects, compiles, and publishes statistical information under the Law on the Bulgarian National Bank Article 42 and the Statute of the ESCB and the ECB Article 5. Alongside regular submissions of reliable and sound statistical information to the ECB, Eurostat, the ESRB, the IMF, and other international institutions, the Bank disseminates timely and up-to-date data to all users of statistical information.

In the first six months of 2016 the BNB continued introducing the new ESA 201088 and other new international statistical standards.

In monetary and interest rate statistics, the Bank continued collecting and disseminat-ing MFI balance sheet data and information on deposits and loans broken down by quantitative categories and economic activity, on interest rates applied by MFIs to de-posits and loans vis-à-vis households and non-financial corporations and on the long-term interest rate for assessing the degree of convergence. In the first six months of 2016 the BNB continued gathering and publishing statistics on non-bank financial in-stitutions, including insurance and investment funds.

Preparations to extend methodological guidelines and reporting forms in monetary and interest rate statistics89, statistics of investment funds90 and financial vehicle corpora-tions engaged in securitisation transactions91, insurance companies92, and pension funds continued to satisfy additional statistical information user requirements and ESA 2010 implementation.

Under the ECB project to expand and amplify information in the Register of Institutions and Affiliates Database (RIAD), work continued on data control and maintenance of quality up-to-date information. The Register contains reference information on credit institutions, money market funds, financial vehicle corporations, investment funds, pay-ment service providers and payment system operators, and holding corporations and head offices.

Technological changes enabled the provision of required information on lists of insur-ance corporations, which were sent to the ECB register in January 2016.

In 2016 work continued on the enhancement of the methodology for compiling bal-ance of payments statistics to the requirements of the sixth edition of the Balance of Payments Manual. In the first half of 2016 an amendment to Ordinance No 27 of the BNB on the Balance of Payments, International Investment Position and Securities Sta-tistics was prepared with regard to the scope, type, and timescales for statistical data submission.

Over the first half-year work continued on the ESCB Centralised Securities Database project and compiling a Bulgarian securities database. As a member of the ESCB, the BNB took part in the Securities Holdings Statistics project on compiling sundry statis-tics and financial stability analyses.

88 Regulation (EU) No 549/2013 of the European Parliament and of the of the Council on the European System of na-tional and regional accounts in the European Union.

89 Regulation (EU) No 1071/2013 concerning the balance sheet of the monetary financial institutions sector and Regu-lation (EU) No 1072/2013 concerning statistics on interest rates applied by monetary financial institutions.

90 Regulation (EU) No 1073/2013 concerning statistics on the assets and liabilities of investment funds.91 Regulation (EU) No 1075/2013 concerning statistics on the assets and liabilities of financial vehicle corporations en-

gaged in securitisation transactions.92 Regulation (EU) No 1374/2014 of the European Central Bank on statistical reporting requirements for insurance cor-

porations (ECB/2014/50).

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On financial accounts, the BNB regularly compiles data on the quarterly financial ac-counts of the general government sector, government finance statistics, and quarterly financial accounts of all sectors.93

With regard to Bulgaria's wish, expressed in 2015, to join the new IMF statistical data dissemination standard, the Special Data Dissemination Standard Plus (SDDS Plus) in the January to May 2016 period the BNB, as national coordinator for this standard, continued working on the accession in cooperation with the NSI and the MF. Under IMF technical requirements, the BNB developed a National Summary Data Page Plus (NSDP Plus) and data dissemination forms. Joint work with IMF Statistical Department experts on methodological and technical issues was of key importance for joining the standard. Further, the BNB as data compiler for SDDS Plus categories, completed preparations to align its quarterly financial accounts data and debt securities statistics with the stand-ard. Following accession to SDDS Plus on 31 May 2016, the BNB commenced regular updates of information published in NSDP Plus to the data dissemination calendar.

In compliance with BIS requirements, the BNB regularly provides macroeconomic statistics.

In the first half of 2016 work continued on developing and elaborating the Integrated Statistical Information System and the Information System for Monetary and Interest Rate Statistics which automate control over electronic statistical information and its processing and dissemination. This enabled the Bank to publish more reliable statisti-cal information.

93 Under Regulation (EC) No 501/2004 of the European Parliament and of the Council, Guideline of the European Cen-tral Bank of 25 July 2013 on the statistical reporting requirements of the European Central Bank in the field of quar-terly financial accounts (recast) (ECB/2013/24), and Guideline of the ECB of 25 July 2013 on government finance statistics (ECB/2013/23).

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Research XIII. Research

Economic research, Bulgarian economic analyses, and macroeconomic forecasts pre-pared by BNB experts support the Bank’s management in making decisions and for-mulating economic policy. In the first half of 2016 research focused on analysing fac-tors behind domestic price dynamics, the relationship between inflation and cyclical position of the economy, labour market research, modelling various banking system aspects, Bulgaria’s foreign trade dynamics and fiscal policy, and developing macro-economic forecasting models.

Specialised research under the 2015 to 2016 BNB Research Plan supported the Bank’s operations by analysing individual economic processes and issues and improving fore-casting and modelling tools. In the first half of 2016 Research Plan implementation ad-dressed the labour expenditure setting mechanisms in non-financial corporations and relations between inflation, potential growth, and structural unemployment. Testing and honing the basic model for BNB macroeconometric forecasting continued to improve related BNB forecasting. Research results featured in technical reports and seminars held by the Bank for experts from relevant bodies, academia, and non-governmental organisations.

Through its Discussion Papers research series, in the first half of 2016 the BNB contin-ued to encourage the research potential of Bulgarian economic science and practice in macroeconomics and finance. The Discussion Papers Publications Council reviewed and approved two submissions for publication.

The BNB quarterly Economic Review presents information and Bulgarian economic forecasts, analyses of the balance of payments flows dynamics, monetary aggregates, their link with the development of the real economy, and their bearing on price stability. External developments directly affecting the Bulgarian economy were also analysed. The Review also contains quantitative assessments of developments anticipated in the short-term in a set of key macroeconomic indicators. From 2016 the BNB publishes macroeconomic forecasts by its experts in the quarterly Economic Review issues 2 and 4.

To streamline the Bank’s publishing process, the BNB Governing Council established a standing Publications Board mandated to formulate Bank publishing policy, submit it to the BNB Governing Council for approval, and implement it.

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XIV. Human Resource Management

Creating a more competitive human resource management and development system was a key objective in the first half of 2016. Improving work conditions and ensuring a sociable environment to attract and keep qualified employees were among priorities.

The first six months of 2016 saw no significant change in staff numbers. At the end of June the Bank employed 853 people from 854 at the end of June 2015. Staff turnover was relatively low. Thirty six employees left, from 30 a year earlier. Three employees retired from 10 a year earlier. Thirty-nine new full timers began work from twenty eight in the first half of 2015. The higher number reflected structural changes approved at the end of 2015 and made in the first half of 2016.

Staff Structure on 30 June (per cent, number)

Source: the BNB.

There were no major changes in staff education and qualification structure. The share of university graduates reached 73 per cent. As at 30 June 2016 twenty-four BNB employees read for doctorates from 19 in the same period of 2015.

In the structure of staff by category, specialists held the largest share at 59 per cent, followed by support staff and management.

The new organisation structure approved by the BNB Governing Council in line with the Law on the Bulgarian National Bank and diverse legal and internal rules and regulations boosted the share of management by some 3 percentage points on 2015. The changes help fulfil commitments on Bank institutional development and optimising performance. They also cut staff categories from four to three.

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entThe age structure changed insignificantly on the first six months of 2015. The share of employees aged up to 30 declined by 1 per cent, while staff numbers in the remaining age groups stayed more or less the same. At the end of the first half-year gender distri-bution remained unchanged from the same period in 2015, with women at 64 per cent and men at 36 per cent.

The Bank promoted staff mobility to boost professional knowledge and skills, and ex-change experience across business areas. The number of employees moving between units rose to 19 in the first half of 2016 from 14 in the first half of 2015. One employee worked on a short-term ECB contract, from six who took on appointments at ESCB cen-tral banks and EU structures a year earlier.

In the first half-year pay continued reflecting performance and mechanisms for meas-uring employees’ individual contributions to the Bank tasks and objectives improved.

The approved annual schedule offered employees plentiful opportunities to take a variety of training and qualification boosting programmes like distance learning, professional courses and seminars in Bulgaria and abroad, language and specialised courses or seminars at home and abroad. Two induction training sessions in the half-year familiarised new employees with Bank corporate culture, topical tasks and challenges, internal rules, and administrative procedures.

Fourteen employees, of whom five reading for doctors’, three for masters’, and six for bachelors’ degrees, boosted their educational attainments without stopping work. Distance learning programmes related to international reserves management, internal audit, and information security.

Employees took specialised courses and seminars in Bulgaria in banking, financial and commercial law, novelties in social insurance and employment relations, public tender procedures, audit techniques and instruments, and defence and mobilisation.

A number of employees took part in various events and training at leading ESCB banks, international financial institutions, and international training centres. These focused on banking supervision, financial stability and macroprudential policy, monetary policy and financial programming, cash circulation management, payment and settlement systems, financial markets, asset management and market operations, modelling and forecasting, accounting, audit, and internal control. Bank employees continued to take courses, seminars and working meetings on the work of ESCB committees and working groups and European supervisory bodies.

The BNB continued providing career opportunities and encouraging students to deepen their research and academic knowledge. The annual scholarship programme for master's and doctor’s degree holders enjoyed greater interest. Two doctoral stu-dents received scholarships after a contest in early 2016. In March the Bank presented its traineeships, scholarships, guest researcher programme, recruitment procedures, and opportunities at the National Career Days annual student and young professional forum. The traineeships programme launched in early June.

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XV. BNB Internal Audit

There were four audits by June 2016: one under the BNB Governing Council’s Annual Internal Audit Programme, and three under the ESCB Internal Auditors Committee Programme. Audits sought assurance of adequate and effective control, corporate governance, and risk management for effective attainment of objectives and tasks; reliability and integrity of financial and operational information; effective and efficient operations and programmes; asset safeguarding; legal, regulatory, internal rule, policy, procedure and contractual observance.

The BNB Annual Internal Audit Programme audit followed-up recommendations from past audits.

ESCB Internal Auditor Committee annual programme audits focused on information and communication technologies and internal services. Implementation of past audit recom-mendations was monitored.

The half-year saw changes in banks’ internal rules and methodological frameworks, and an update of the Rules of Procedure and Operations Manual. Opinions were given on draft internal regulations on major BNB functions. A plan to upgrade quality assurance software and revise the audit plan risk evaluation methodology and update risk level definition was developed and implemented. Audit management software was upgraded.

In the first half of 2016 the BNB General Auditor coordinated Internal Audit Unit work with external auditors and the Republic of Bulgaria Court of Auditors auditing team.

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XVI. BNB Budget Implementation in the First Half of 2016

The Governing Council adopted the BNB budget by Resolution No 115 of 26 Novem-ber 2015.

The report on the Bank’s budget comprises two sections pursuant to the Governing Council Internal Rules on Drafting, Implementing, and Reporting the BNB Budget: BNB Operating Expenditure and Investment Programme.

I. Operating Expenditure

BNB operating expenditure budget implementation in the first half of 2016 came to BGN 42,716 or 44.3 per cent of annual budget.

Currency circulation cost BGN 11,548,000 or 59.1 per cent of annual budget and 27 per cent of operating expenditure budgeted for the half-year. New banknotes cost BGN 5,887,000 and BGN 5,378,000 was spent on minting, of which BGN 5,269,000 on circulation. Commemorative coins cost BGN 109,000 in line with the BNB Governing Council Commemorative Coin Programme. Spending on machines for servicing circu-lating cash came to BGN 95,000 and that on consumables for banknote and coin pro-cessing to BGN 107,000. Renting premises at the Cash Services Company AD and the Bulgarian Mint EAD cost BGN 81,000.

Materials, services, and depreciation cost BGN 15,769,000 or 37.4 per cent of the an-nual budget under this item and 36.9 per cent of operating expenditure in the first half of 2016. Materials totalled BGN 314,000 or 21.8 per cent of approved funds under this item and 0.8 per cent of operating expenditure. Vehicle fuel and spares had the largest share in this group at BGN 113,000. The Bank spent BGN 91,000 on office consuma-bles. External services cost BGN 8,348,000 or 33.8 per cent of annual item budget and 19.6 per cent of half-year operating expenditure. Software maintenance subscriptions at BGN 1,761,000, Bloomberg, Reuters, internet and other systems at BGN 546,000, mandatory TARGET2 modules at BGN 527,000, and BORICA–Bankservice AD sub-scriptions at BGN 264,000 held a significant share in this group, these fees occupying 37.1 per cent of external service costs. Equipment maintenance cost BGN 861,000. Property and refuse collection levies were BGN 898,000. Mail and telephone services cost BGN 344,000, with a trend towards improving and updating BNB voice services. Electric bills were BGN 453,000 and heating and water cost BGN 111,000. In the first half of 2015 property insurance cost BGN 58,000. The Bank spent BGN 96,000 on se-curity and fire protection. Major building maintenance cost BGN 861,000 for the re-porting period. Consultancy services cost BGN 1,156,000. The Bank spent this on a banks’ asset quality review, legal representation and judicial protection, legal opinions, and banking and financial history research. In the first six months of 2016 depreciation was BGN 7,107,000 or 44.4 per cent of annual budget or 16.6 per cent of operating expenditure.

Payroll, social, and healthcare spending was BGN 12,318,000 or 46.1 per cent of item budget and 28.8 per cent of total operating expenditure. The Bank reported BGN 1,725,000 of current retirement obligations and unused paid leave under IAS 19, Income of Hired Persons.

Social expenditure was BGN 1,454,000 or 61.7 per cent of budget and 3.4 per cent of operating expenditure.

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Miscellaneous administrative spending (inland and foreign business travel, training and representative expenses) was BGN 395,000 or 17.2 per cent of budget and 0.9 per cent of operating expenditure. Inland travel worth BGN 38,000 involved mainly regional cash centre logistics and checks. Foreign travel unrelated to the ESCB and other EU bod-ies cost BGN 115,000. The annual BNB Staff Education and Professional Training Pro-gramme cost BGN 212,000. BNB employees took part in various distance learning pro-grammes, professional courses and seminars organised by EU central banks, interna-tional financial institutions, and international training centres. The Bank's representative and protocol expenses were BGN 30,000.

The BNB spent BGN 1,232,000 on BNB participation in the ESCB, or 35.6 per cent of annual budget for this item and 2.9 per cent of operating expenditure. BNB representa-tives took part in ESCB committees and working groups and other EU bodies, travel costing BGN 332,000 and training BGN 22,000. The annual fee for European Banking Authority membership was BGN 878,000.

II. Investment Programme

Spending on the Bank's investment programme was BGN 547,000 or 2.7 per cent of annual item budget.

The investment programme involved public tendering, contractor selection, and project implementation. In the first half-year some procurement procedures were not finalised and others were completed but implementation had not started. Projects postponed for the second half-year contributed to the low rate of budget take up.

In the first six months of 2016 the Bank spent BGN 296,000 on construction, refur-bishment, and modernisation or 5.1 per cent of annual item budget and 54.1 per cent of total investment funds for the half-year. Funds went on general construction works and supervision of conservation and repair works of the BNB Cash Centre building in Pleven.

Funds earmarked for design and construction of the joint BNB and BORICA–Bankser-vice AD cash and information centre in Plovdiv were not used as an additional assess-ment of participants’ investment intentions changed design specifications.

Machine and equipment, vehicle, and other equipment investment came to BGN 127,000, or 9.4 per cent of annual budget and 23.2 per cent of investment for the half-year. Replacing the BNB main building power substation cost BGN 84,000. BGN 17,000 went on expanding Bank premises access control, BGN 24,000 on equip-ment servicing currency circulation, and BGN 2000 on sundry equipment. Budget funds under the Bank’s investment programme for office furniture and equipment provide workstations at the Bank’s main building and the project is expected to end at the end of the year.

Funds invested into information systems totalled BGN 124,000, or 0.9 per cent of an-nual budget and 22.7 per cent of investment in the half-year. Funds went mostly into keeping BNB information and communication technology infrastructure modern. Hard-ware cost BGN 52,000, mainly for computer and communications equipment. Software spending of BGN 72,000 expanded the functionality of existing systems. Funds were budgeted for replacement servers. As the delivery was underway at the end of the first half-year, the funds would be spent in the next reporting period.

The budgeted BGN 1,400,000 for replacing the foreign reserve management informa-tion system was not spent as the public call for contractors was terminated.

Work on developing existing and introducing new functional systems was not subject to accounting at the close of the half-year and funds were not spent.

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IndicatorReport

30 June 2016(BGn’000)

Budget 2016(BGn’000)

Implementation(per cent)

Section I. Operating Expenditure 42,716 96,511 44.3

Currency circulation expenditure 11,548 19,533 59.1

Materials, services, and depreciation expenditure 15,769 42,161 37.4

Staff expenditure 12,318 26,699 46.1

Social activity expenditure 1,454 2,355 61.7

Other administrative expenditure 395 2,301 17.2

BNB expenditure on ESCB membership 1,232 3,462 35.6

Section II. Investment Programme 547 20,605 2.7

Expenditure on construction, refurbishment, and modernisation 296 5,824 5.1

Expenditure on machines, vehicles, and other equipment 127 1,356 9.4

Expenditure on BNB computerisation 124 13,425 0.9

Investment related to ESCB membership 0 0

Source: the BNB.

XVII. Bulgarian National Bank Consolidated Financial Statements as of 30 June 2016 (unaudited)

Statement of Responsibilities of the Governing Council

of the Bulgarian National Bank __________________________________82

Consolidated Statement of Comprehensive Income

for the Period Ended 30 June 2016 (unaudited) _____________________ 83

Consolidated Statement of Financial Position

as of 30 June 2016 (unaudited) __________________________________84

Consolidated Statement of Cash Flows

for the Period Ended 30 June 2016 (unaudited) ______________________ 85

Consolidated Statement of Changes in Equity

for the Period Ended 30 June 2016 (unaudited) ______________________ 86

Notes to the Consolidated Financial Statements _____________________ 87

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Statement of Responsibilities of the Governing Council of the Bulgarian National Bank

The Law on the Bulgarian National Bank requires the Governing Council to prepare

financial statements to present the Bank’s financial position and performance for

the period.

The financial statements of the Bulgarian National Bank approved by the Govern-

ing Council are prepared in accordance with the International Financial Reporting

Standards adopted by the European Commission.

The Governing Council of the Bulgarian National Bank is responsible for maintaining

proper accounting records, which disclose with reasonable accuracy at any time

the financial position of the Bulgarian National Bank. It has overall responsibility for

taking such steps so as to safeguard the assets of the Bulgarian National Bank and

to prevent or detect fraud and other irregularities.

Dimitar Radev

Governor of the BNB

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Consolidated Statement of Comprehensive Income for the Period Ended 30 June 2016 (unaudited)

(BGN’000)

note 30 June 2016 30 June 2015

Interest income 7 205,191 201,911Interest expenses 7 (7,751) (2,754)Net interest income 197,440 199,157

Fee and commission income 5,764 4,871Fee and commission expenses (2,557) (2,352)Net fee and commission income 3,207 2,519

net (losses)/gains from financial assets and liabilities at fair value through profit or loss 8 567,394 (112,050)other operating income 9 25,763 24,865

Total income from banking operations 793,804 114,491

administrative expenses 10 (55,903) (45,930)

(Loss)/profit for the period 737,901 68,561

Other comprehensive incomeother comprehensive income (72) (3,880)Other comprehensive income, total (72) (3,880)Total comprehensive income for the period 737,829 64,681

Profit attributable to:equity holder of the Bank 737,764 68,471non-controlling interest 137 90(Loss)/profit for the period 737,901 68,561

Total comprehensive income attributable to:equity holder of the Bank 737,692 64,591non-controlling interest 137 90Total comprehensive income for the period 737,829 64,681

The accompanying notes on pages 87 to 117 form an integral part of the Consolidated Financial Statements.

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Consolidated Statement of Financial Position as of 30 June 2016 (unaudited)

(BGN’000)

note 30 June 2016 31 december 2015

ASSETS

Cash and deposits in foreign currencies 11 11,184,696 10,881,166

Gold, instruments in gold and other precious metals 12 3,038,628 2,504,516

Financial assets at fair value through profit or loss 13 29,468,991 26,238,186

Financial assets available for sale 14 2,267,233 1,647,810

tangible assets 15 165,587 172,664

Intangible assets 16 3,431 4,289

other assets 17 107,275 98,193

Total assets 46,235,841 41,546,824

LIABILITIES

Banknotes and coins in circulation 18 12,657,820 12,724,818

due to banks and other financial institutions 19 11,796,726 14,860,012

Liabilities to government institutions and other liabilities 20 13,112,415 6,577,074

Borrowings against Bulgaria’s participation in international financial institutions 21 3,472,503 3,021,397

other liabilities 22 259,159 143,437

Total liabilities 41,298,623 37,326,738

EQUITY

Capital 23 20,000 20,000

Reserves 23 4,912,481 4,195,486

non-controlling interest 24 4,737 4,600

Total equity 4,937,218 4,220,086

Total liabilities and equity 46,235,841 41,546,824


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Consolidated Statement of Cash Flows for the Period Ended 30 June 2016 (unaudited)

(BGN’000)

note 30 June 2016 30 June 2015

OPErATINg AcTIvITIES

net profit 761,425 68,561

adjustments:

dividend income 9 (31,394) (10,165)

depreciation and amortisation 15, 16 8,897 9,065

Loss on disposal of tangible assets 383 12

Profit/(loss) on financial assets and liabilities arising from market movements (734,996) 56,538

Loss/(profit) of associates - -

other adjustments (24,653) (3,880)

Net cash flow from operating activities before changes in operating assets and liabilities (20,338) 120,131

change in operating assets

(Increase) in gold, instruments in gold and other precious metals (4,985) (3,081)

(Increase) in financial assets at fair value through profit or loss (3,033,850) (2,441,340)

(Increase) in financial assets available for sale

- Republic of Bulgaria‘s quota in the IMF (628,992) -

(Increase) in other assets (6,623) (10,914)

change in operating liabilities

(decrease) in currency in circulation (66,998) (357,705)

(decrease)/increase in due to banks and other financial institutions (3,063,286) 2,182,427

(Increase) in due to government institutions and other liabilities 6,535,341 3,500,762

Increase in borrowings from IMF of total allocation of SdR 469,589 -

(decrease)/increase in other liabilities 115,722 (148,889)

Net cash flow (used in)/from operating activities 295,580 2,841,391

INvESTINg AcTIvITIES

acquisition of tangible and intangible assets (1,345) (4,142)

dividends received 31,394 10,165

Net cash flow (used in) investing activities 30,049 6,023

FINANcINg AcTIvITIES

Payments to the government (19,640) (48,564)

Net cash flow (used in) financing activities (19,640) (48,564)

Net increase in cash and cash equivalents 305,989 2,798,850

cash and cash equivalents at beginning of period 10,951,676 6,605,981

cash and cash equivalents at end of period 11, 17 11,257,665 9,404,831


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Consolidated Statement of Changes in Equity for the Period Ended 30 June 2016 (unaudited)

(BGN’000)

CapitalRevaluation of non-monetary

assets

Special and other reserves

total capital and reserves

non-controlling

interest total equity

Balance as of 1 January 2015 20,000 134,979 4,190,981 4,345,960 4,420 4,350,380

Profit/(Loss) for the period - - 68,471 68,471 90 68,561

other comprehensive income:

- other income - (5) (3,875) (3,880) - (3,880)

other comprehensive income, total - (5) (3,875) (3,880) - (3,880)

total comprehensive income for the period - (5) 64,596 64,591 90 64,681

Contributions by and distributions to owners:

- contribution to the budget of the Republic of Bulgaria - - (48,564) (48,564) - (48,564)

- dividend paid by subsidiaries to minority shareholders - - - - - -

Balance as of 30 June 2015 20,000 134,974 4,207,013 4,361,987 4,510 4,366,497

Balance as of 1 January 2016 20,000 136,336 4,059,150 4,215,486 4,600 4,220,086

Profit for the period - - 737,764 737,764 137 737,901

other comprehensive income:

- other income - - (72) (72) - (72)

other comprehensive income, total - - (72) (72) - (72)

total comprehensive income for the period - - 737,692 737,692 137 737,829

Contributions by and distributions to owners:

- contribution to the budget of the Republic of Bulgaria - - (19,640) (19,640) - (19,640)

- dividend paid by subsidiaries to minority shareholders - - (1,057) (1,057) - (1,057)

transactions with owners, total - - (20,697) (20,697) - (20,697)

Balance as of 30 June 2016 20,000 136,336 4,776,145 4,932,481 4,737 4,937,218


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Notes to the Consolidated Financial Statements

1. Statute and Principal Activities

The Bulgarian National Bank (the ‘Bank’) is 100 per cent owned by the Bulgarian state and is the central bank of the Republic of Bulgaria. The operation of the Bank is gov-erned by the Law on the Bulgarian National Bank (LBNB), which has been effective since 10 June 1997.

Under this Law, the principal activities of the Bank may be summarised as:

• Maintaining price stability through ensuring national currency stability;

• Exclusive right to issue banknotes and coins;

• Regulation and supervision of other banks’ activities in the country with a view to banking system stability maintenance;

• Establishment and operation of efficient payment systems;

• Regulation and supervision of the activity of payment system operators, payment institutions and electronic money institutions in the country;

• The Bank shall not extend credit and guarantees in any form whatsoever, including through purchase of debt instruments, to the Council of Ministers, municipalities, as well as to other government and municipal institutions, organisations and enterprises;

• The Bank may not provide credit to banks except in the case of liquidity risk threaten-ing to affect the stability of the banking system;

• The Bank may not deal in Bulgarian government securities;

• The Bank may not issue Bulgarian levs in excess of the Bulgarian lev equivalent of the gross international reserves;

• The Bank acts as the fiscal agent and depository for the State.

The Governing Council of the BNB approved the consolidated financial statements set out on pages 81 to 117 on 24 November 2016.

2. Applicable Standards

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Commission.

3. Basis of Preparation

The consolidated financial statements are presented in Bulgarian lev rounded to the nearest thousand (BGN’000), which is the functional currency of the Bank. They are prepared on a historical cost basis, except for the following items, which are measured on an alternative basis as at each reporting date:

Items Measurement basis

derivative financial instruments Fair value

non-derivative financial instruments at fair value through profit or loss

Fair value

available-for-sale financial assets Fair value

tangible non-current assetsRevalued amount, which is the asset’s fair value at the revaluation date less subsequent depreciation and impairment loss

defined benefit liability Present value of the defined benefit liability

Useofestimatesandjudgements

In preparing these Consolidated Financial Statements, the Bank has made judgements, estimates and assumptions that affect the reported amounts of assets and liabilities, incomes and expenses, and the disclosure of contingent receivables and payables as at the Financial Statements date. These estimates, judgements and assumptions are based on data available as at the date of the Consolidated Financial Statements; therefore actual future results may differ from these estimates.

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The estimates and main assumptions are revised on an ongoing basis and are recog-nised prospectively.

Judgements

The Bank has estimated and classified cash in circulation as a financial liability (see note 18).

Assumptionsandestimationuncertainties

Measurements of the present value of long-term obligations to retiring staff (following a defined benefit plan) use certified actuarial calculations based on mortality assump-tions, rate of staff turnover, future level of salaries and discount factor, which assump-tions may lead to adjustments in the next financial year; management, however, consid-ers them to be reasonable and appropriate for the Bank (note 10).

Some of the Bank’s accounting policies and disclosures require fair value measure-ments of financial and non-financial assets and liabilities. For information on fair value measurements see note 6(e) and note 15.

Newandamendedstandardsandclarifications

The accounting policies adopted are consistent with those of the previous financial year. The following amendments to standards have been adopted by the Bank as of 1 January 2015:

• Annual improvements to IFRSs 2011–2013 Cycle which comprise minor clarification changes in:

– IFRS 3 Business Combinations

– IFRS 13 Fair Value Measurement

– IAS 40 Investment Property

The adoption of the above amendments to standards has no effect on the Bank’s fi-nancial statements.

4. Basis of Consolidation

Subsidiaries

Subsidiaries are the entities controlled by the Bank. Control over an entity exists when the Bank is exposed to or has rights over the variable return from its participation in that entity, and is able to influence that return through its powers. The financial state-ments of the subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. The share in the net assets of the Bank’s subsidiaries, which corresponds to the minority shareholders’ proportionate share, is disclosed separately from Capital and Reserves under the Non-controlling Interest item.

Associatedcompanies

Associates are those entities in which the Bank has significant influence, but which are neither subsidiary enterprise, nor joint venture. Investments in associates are ac-counted for in the Bank’s Consolidated Financial Statements using the equity method as an amount corresponding to the Bank’s share in the associates’ own funds as of the end of the reporting period. The Bank’s share of associates’ net results subsequent to acquisition is disclosed in ‘profit or loss’ as investment income/expenses and is added to/subtracted from the carrying value of the investment.

Transactionseliminatedonconsolidation

All receivables and payables, incomes and expenses, as well as intragroup profits, re-sulting from inter-company transactions within the group, are eliminated, except where these are immaterial.

5. Significant Accounting Policies

(a) Income recognition

Interest income and expense are recognised in the ‘profit or loss’ using the effective interest rate method. The effective interest rate is the rate which precisely discounts

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the estimated future cash payments and income over the term of the financial asset or liability to the carrying amount of the asset or liability. The effective interest rate is determined on the initial recognition of the financial asset or liability and does not change thereafter.

The calculation of the effective interest rate includes all transaction costs and fees and points that are an integral part of the effective interest rate. Transaction costs include incremental costs directly attributable to the acquisition, issue or derecognition of a financial asset or liability.

Interest income and expense presented in the statement of profit or loss include:

• interest on financial assets and financial liabilities measured at amortised cost calcu-lated on an effective interest basis;

• interest on available-for-sale investment securities calculated on an effective interest basis.

Dividend income is recognised in profit or loss when the Bank establishes the right to receive income. Foreign currency differences arising from available-for-sale invest-ments are recognised in profit or loss.

Net gains/losses from financial assets and liabilities at fair value through profit or loss include net gains from operations in securities, net gains from operations in foreign currency, net revaluation gains on securities, net gains from gold revaluation, net gains from revaluation of futures, and net gains from revaluation of assets and liabilities de-nominated in foreign currencies.

(b) Financial instruments

(i) Classification

For the purposes of measuring financial instruments subsequent to initial recognition, the Bank classifies the financial instruments into four categories:

Financial instruments at fair value through profit or loss are those that the Bank holds primarily for the purpose of short-term profit. These include investments that are not designated for any particular purpose and effective hedging instruments and liabilities from short-term sales of financial instruments. Net receivables under derivatives held for trading (positive fair value), as well as options purchased, if any, are reported as trading assets. All net liabilities under derivatives for trading (negative fair value), as well as options written, if any, are reported as trading liabilities.

Loans and receivables are instruments issued by the Bank through providing money to a debtor other than those created with the intention of short-term profit taking.

Held-to-maturity financial assets are assets with fixed or determinable payments and fixed maturity that the Bank has the intent and ability to hold to maturity.

Available-for-sale financial assets are all assets that cannot be classified in any other category, as well as those financial assets designated as available for sale at initial recognition.

(ii) Recognition

The Bank recognises trading financial assets and investments, the Bank’s loans and receivables, and financial liabilities at amortised cost on the date at which they are originated. All other financial assets and financial liabilities are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. From that moment on, any changes in their fair value are recognised by the Bank as income or expense.

Financial instruments are initially measured at fair value, and for those financial instru-ments which are not recognised at fair value through profit or loss the amount recog-nised includes directly attributable acquisition costs.

(iii)Amortisedcostmeasurement

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured upon the initial recognition, minus principal repayments, plus or minus cumulative amortisation using an effective interest rate for the difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.

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(iv)Fairvaluemeasurementanddisclosureprinciples

Fair value is the price that would be received to sell an asset or paid to transfer a li-ability in an orderly transaction between market participants in the principal market and, if no such market is available, then in the most advantageous and accessible market on the measurement date. The fair value of a liability reflects the effect of non-performance risk.

Whenever possible, the Bank measures the fair value of an instrument using quoted prices in an active market of that instrument. A market is considered as active if trans-actions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If no quoted price in an active market is available, the Bank uses the most relevant observable inputs and makes minimum use of unobservable data. The aim of using a valuation technique is to estimate the price that would be obtained in an orderly trans-action between market participants. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Bank, incor-porates all factors that market participants would consider in determining a price, and is consistent with accepted economic methodologies for pricing financial instruments.

Inputs to valuation techniques reasonably represent market expectations and meas-ures of the risk-return factors inherent in the financial instrument. The Bank calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received. When the Bank finds a difference between the fair value at initial recognition and the transaction price, and the fair value is neither evidenced by quoted price in an active market for identical assets or liabilities, nor based on a valuation technique based only on data from observable markets, then the financial instrument is initially recognised at fair value adjusted with the difference between the fair value at initial recognition and the transaction price. This difference is subsequently recognised in profit or loss on an ap-propriate basis over the life of the instrument but not later than when the valuation is supported wholly by observable market data or the transaction is closed out.

The Bank recognises assets and long positions at a bid price and liabilities and short positions at an ask price when assets or liabilities measured at fair value have a bid and an ask price.

Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Bank on the basis of the net exposure to either mar-ket or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio.

Where the Bank has positions with offsetting risks, mid-market prices are used to meas-ure them and a bid or ask price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjust-ments to take account of the credit risk of the Bank entity and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other fac-tors, such as liquidity risk or model uncertainties, to the extent that the Bank believes a third-party market participant would take them into account in pricing a transaction.

The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

(v) Derecognition

The Bank derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the rights to the receipt of the con-tractual cash flows from the financial asset in the transaction in which substantially all risks and rewards of ownership of the financial asset are transferred. Any holding in transferred financial assets, which has been originated or kept by the Bank, is recog-nised as a separate asset or liability.

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The Bank derecognises a financial liability when its contractual obligations are dis-charged or cancelled or expired.

The Bank enters into transactions whereby it transfers assets recognised in its state-ment of financial position, but retains either all or the substantial risks and rewards of the transferred assets or a part of them. If a part of or all substantial risks and rewards are retained, then the transferred assets are not derecognised from the statement of financial position. Transfers of assets with retention of a part of or all substantial risks and rewards are, for instance, securities lending or repurchase agreements.

In transactions where the Bank neither retains, nor transfers all substantial risks and rewards of ownership of a financial asset, it derecognises the asset if it does not retain the control of that asset. The rights and obligations retained in the transfer are recog-nised separately as assets and as liabilities respectively. In transactions where control of the asset is retained, the Bank continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which the Bank is exposed to changes in the value of the transferred asset.

In certain transactions the Bank retains the obligation to service the transferred finan-cial asset for a fee. The transferred asset is derecognised if it meets the derecognition criteria. An asset or liability is recognised for the servicing contract, depending on whether the servicing fee is more than adequate (asset) or is less than adequate (li-ability) for performing the servicing.

(vi)Offsetting

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, the Bank has a legal right to offset the recognised amounts and intends to settle the asset or the liability on a net basis.

Income and expenses are presented on a net basis only when permitted under IFRSs, or for gains and losses arising from a group of similar transactions such as in the Bank’s trading operations.

(vii)Impairmentofassets

Financial assets which are not carried at fair value through profit or loss are reviewed at each reporting date to determine whether there is evidence of impairment. Financial assets are impaired if there is objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the asset and that the loss event had an impact on the future cash flows which can be reliably estimated.

Objective evidence of impairment loss from financial assets, including equity instru-ments, is a default or a borrower’s inability to repay his obligations, restructuring of loans under unfavourable financial conditions for the Bank, indications that a borrower or the issuer of a financial instrument would go out of business, the disappearance of an active security market, or other public information. Furthermore, in case of a continu-ous or significant fall in the market value of an investment in equity instruments, there is objective evidence of impairment of these equity instruments.

The Bank considers the need of impairment of loans or investments held to maturity at both individual and group level. All individually significant loans and investments held to maturity are evaluated for specific impairment. All individually significant loans and investments held to maturity on which no specific impairment losses have been charged are evaluated on a portfolio basis. Loans and held-to-maturity investments that are not individually significant are collectively assessed for impairment by grouping to-gether loans and held-to-maturity investment securities with similar risk characteristics.

In assessing collective impairment the Bank uses statistical modelling of historical trends of the probability of default, timing of recoveries and the amount of loss in-curred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate.

Impairment losses from assets carried at amortised cost are measured as the differ-ence between the carrying amount of the financial asset and the present value of the estimated future cash flows discounted by the original effective interest rate of the asset. Impairment losses are recognised in profit or loss and reflected in an allowance

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account against loans and receivables. Interest on the impaired asset continues to be recognised through unwinding of the discount. When a subsequent event reduces im-pairment loss, the reduction in the impairment loss is reversed through profit and loss.

Impairment losses on available-for-sale investment securities are recognised by trans-ferring the cumulative loss that has been recognised in equity to profit or loss. The cu-mulative loss that is transferred from profit or loss is the difference between the acquisi-tion cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. If, in a subsequent period, the fair value of an impaired debt security available for sale increases and the increase can be objectively linked to an event that occurred after the impairment loss had been recognised in profit and loss, then the impairment loss is reversed and the reversed amount is recognised in profit and loss. However, any subsequent recovery in the fair value of an impaired equity instrument available for sale is directly recognised in other comprehensive income.

(viii)Financialassets/liabilitiesheldfortrading

Financial assets at fair value through profit or loss include instruments which the Bank acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed as a whole with the purpose of short-term profit.

Initially financial assets and liabilities held for trading are recognised at fair value in the statement of financial position and transaction costs recognised in profit or loss. All changes in the fair value are recognised as net income from trading operations in profit or loss.

(ix)Investments(1) Held-to-maturity investments

Held-to-maturity financial assets are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the intent and ability to hold to maturity, are not designated at fair value through the profit or loss, and are not available for sale financial assets.

Held-to-maturity investments are carried at amortised cost on the basis of an effective interest rate method. In case of sale or reclassification of more than an insignificant part of the assets held to maturity that are not falling due in the immediate future, there should be a reclassification of the entire portfolio of investments held to maturity in the group of available-for-sale investments. As a result of this reclassification, the Bank may not classify investments as held to maturity in the current year and the following two years.

(2) Available-for-sale investments

Available-for-sale investments are non-derivative assets that cannot be classified in any other category of financial assets. Equity investments not quoted in the market and whose fair value cannot be reliably measured are carried at cost. All other available for sale investments are carried at fair value.

Differences in the fair value are recognised directly in equity until the investment is sold or fully impaired when the cumulative gains and losses recognised in equity are recognised in profit or loss.

(c) Gold and other precious metals

The BNB as a central bank maintains particular volumes of gold as part of Bulgaria’s international reserves. In compliance with the requirements of the Law on the BNB, the Bank may take any necessary action in connection with the acquisition, possession and sale of gross international reserves, including monetary gold. Consequently, monetary gold as part of international reserves may be immediately used by the BNB without fur-ther constraints which determines it as a monetary asset. Pursuant to the requirements of the ‘General Provisions for Defining the Valuation Basis in the Financial Statements’ to the IFRS, and where there is no specific IFRS guidance, the Bank defines the rec-ognition and valuation of the monetary gold as an asset reported at fair value through profit or loss as the most reliable and appropriate base for a subsequent valuation of this financial asset.

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Gold and other precious metals are measured at market value based on the London Bullion Market fixing in euro at the reporting date.

(d) Equity investments

For the purposes of measuring the equity investments subsequent to initial recognition, they are classified as available-for-sale financial assets and are measured at fair value.

Details of investments held by the Bank are set out in note 14.

(e) Property, plant, equipment and intangible assets

The Bank presents land, buildings and other groups of fixed tangible assets in the statements of financial position at revalued amount as per the alternative approach allowed in IAS 16 Property, Plant and Equipment. The intangible assets are measured in the statement of the financial position at cost, less accumulated depreciation, and impairment losses.

Land and buildings are measured at fair value which is regularly assessed by profes-sionally qualified valuers. The revaluation of property is done asset by asset, and any accumulated depreciation at the revaluation date is derecognised against the gross carrying amount of the asset, and the net amount restated to the revalued amount of the asset. When the value of assets increases as a result of revaluation, the increase is reflected directly in other comprehensive income. When the value of assets decreases as a result of revaluation, the decrease is recognised by decreasing the revaluation reserve in equity, and in case of a shortage, the difference is recognised as an expense in profit or loss.

1) Subsequentcosts

The separately accounted for costs incurred to replace a component of an item of prop-erty, plant and equipment are capitalised. All other subsequent costs are capitalised only when future economic benefits embodied in the item of property, plant and equip-ment will flow to the Bank. All other costs are recognised in ‘profit or loss’ as incurred.

2) Depreciation

Depreciation is provided on a straight-line basis at prescribed rates designed to write down the cost of revalued amount of property, plant, equipment and intangible assets over their estimated useful lives. Land is not depreciated. The annual depreciation rates used are as follows:

(per cent)

Buildings 2–4Plant & equipment 3–15Computers 30–33.3 Fixtures and fittings 15–20 Motor vehicles 8–25Intangible fixed assets 20–25

Expenditures incurred for the acquisition of property, plant, equipment and intangible assets are not depreciated until they are brought into use.

3) Calculationofrecoverableamountofassets

The recoverable amount of the Bank’s fixed assets is the higher of the net selling price and value in use. In assessing value in use, the estimated future cash flows are dis-counted to their present value using the Bank’s incremental borrowing rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recov-erable amount is determined for the cash-generating unit to which the asset belongs.

4) Reversalsofimpairment

Impairment losses of tangible fixed assets are reversed when a change occurs in the estimates used to determine the recoverable amount and may be reversed only up to that carrying amount of the asset before recognising impairment losses.

(f) Foreign exchange

Gains and losses arising in foreign currencies are translated to BGN at the official rates of exchange on the transaction date. Monetary assets and liabilities denominated in

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foreign currencies at the reporting date are translated at the official exchange rate of the Bank on that day. Foreign currency gains and losses resulting from the revaluation of monetary assets and liabilities are recognised in profit or loss. Non-monetary assets and liabilities denominated in foreign currency are retranslated to the functional cur-rency at the exchange rate at the date that the fair value was determined.

Outstanding forward contracts in foreign currency are marked to market. The gains and losses on revaluation of outstanding forward contacts are recognised in profit or loss.

The exchange rates of the major foreign currencies as of 30 June 2016 and 31 December 2015 are as follows:

Currency 30 June 2016 31 december 2015uS dollars 1 : BGn 1.76169 1 : BGn 1.79007euro 1 : BGn 1.95583 1 : BGn 1.95583Special drawing Rights 1 : BGn 2.46432 1 : BGn 2.48258 Gold 1 troy ounce : BGn 2314.90 1 troy ounce : BGn 1911.36

(g) Taxation

The Bank is not subject to income tax from its core activities. Income tax from subsidi-aries for the period comprises current tax and deferred tax. Current tax comprises tax payable calculated on the basis of the expected taxable income for the period, using the effective tax rate or the current one at the reporting date. Deferred tax is derived using the balance sheet liability method on all temporary differences between the amounts used for taxation purposes and the carrying amounts of assets and liabilities.

The deferred tax is calculated using tax rates which are expected to be applied for the period of asset realisation or liability settlement. The effect on the deferred tax from changes in the tax rates is recorded in the statement of comprehensive income up to the amount already charged or reported directly as other comprehensive income.

A deferred tax asset is recognised to the extent that is probable that future taxable prof-its will be available against which the unused tax losses or tax credit can be utilised. The deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(h) Profit distribution policy of the Bank

The Bank’s policy of distribution of profit from banking operations is defined in the Law on the BNB. Internal rules for preparation of financial statements and accounting poli-cies were adopted upon a decision of the Governing Council effective from 1 January 2007, which are in compliance with Article 36, paragraphs 1 and 2 of the Law on the BNB. According to these rules, the Bank allocates to special reserves unrealised net gains and losses arising from revaluation of assets and liabilities denominated in for-eign currency or gold. According to the requirements of Article 8, paragraph 2 of the Law on the BNB, the Bank sets aside 25 per cent of the excess of its annual revenue over its annual expenditure into a Reserve Fund. According to Article 8, paragraph 3 of the Law on the BNB, after the allocation to the Reserve Fund, the Bank may allocate re-serves to cover market risk losses and other reserves upon a decision of the Governing Council. Subsequent to the allocation of reserves as required by the Law on the BNB, the Bank stipulates the remainder to be paid into the State Budget. The distribution of excess of revenue over expenditure is set out in note 23.

(j) Cash in hand and deposits in foreign currency

Cash and cash equivalents consist of cash in hand, current accounts and time deposits with maturities of less than three months.

(j) Employee benefits

The Bank has the obligation to pay certain amounts to each employee who retires in accordance with the requirements of Article 222, § 3 of the Labour Code in Bulgaria. According to these Labour Code requirements, on termination of the employment con-tract of an employee who has become entitled to retirement, the employer is obliged to pay him/her compensation amounting to twice his/her gross monthly salary. If, at the date of retirement, the employee has been employed by the Bank for ten or more years, the amount of the compensation is six gross monthly salaries. As at the date of the statement of financial position, the Bank’s Management estimates the approximate

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amount of the potential expenditures for all employees based on an actuarial report using the projected unit credit method. The estimated amount of the obligation and the main assumptions, on the base of which the estimation of the obligation has been made, is disclosed to the Financial Statements in note 10.

Terminationbenefits

Termination benefits are recognised as an expense when the Bank is committed de-monstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination ben-efits as a result of an offer made to encourage voluntary redundancy. Termination ben-efits for voluntary redundancies are recognised as an expense if the Bank has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.

Short-termemployeebenefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under a short-term cash bonus or profit-sharing plans if the Bank has a present constructive obligation to pay this amount as a result of past services provided by the employee, and the obligation can be estimated reliably. The Bank recognises as a liability the undiscounted amount of the estimated costs related to an-nual leave expected to be paid in exchange for the employee’s service for the period completed.

(k) Standards issued but not yet effective and not early adopted

Standards issued but not yet effective and not early adopted up to the date of issu-ance of the Bank financial statements are listed below. This listing is of standards and interpretations issued, which the Bank reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. The Bank intends to adopt those standards when they become effective.

IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets (Amendments): Clarification of Acceptable Methods of Depreciation and Amortisation

The amendments are effective for annual periods beginning on or after 1 January 2016. They clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, the ratio of revenue generated to total revenue expected to be generated can-not be used to depreciate property, plant and equipment or amortise intangible assets. It is not expected that these amendments would be relevant to the Bank.

IAS 19 Employee Benefits (Amended): Employee Contributions

The amendment is effective for annual periods beginning on or after 1 February 2015. The amendment applies to contributions from employees or third parties to defined benefit plans. The objective of the amendment is to simplify the accounting for contri-butions that are independent of the number of years of employee service, for example, employee contributions that are calculated according to a fixed percentage of salary. It is not expected that this amendment would be relevant to the Bank.

IFRS 9 Financial Instruments

The standard is applied for annual periods beginning on or after 1 January 2018 with early adoption permitted. The final phase of IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. The standard has not been yet endorsed by the EU. The Bank will analyse and assess the impact of the new standard on its future financial position or performance.

IFRS 11 Joint Arrangements (Amendment): Accounting for Acquisitions of Interests in Joint Operations

The amendment is effective for annual periods beginning on or after 1 January 2016. It adds new guidance on how to account for the acquisition of an interest in a joint op-

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eration that constitutes a business in accordance with IFRS. It is not expected that this amendment would be relevant to the Bank.

IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying the Consolidation Exception (Amendments)

The amendments are effective for annual periods beginning on or after 1 January 2016. The amendments clarify that the exemption from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an investment entity, when the investment entity measures all of its subsidiaries at fair value. Also, the amendments clarify that only a subsidiary that is not an investment entity itself and provides support services to the investment entity is consolidated. All other subsidiaries of an investment entity are measured at fair value. The amendments to IAS 28 Investments in Associates and Joint Ventures allow the investor, when applying the equity method, to retain the fair value measurement applied by the investment entity associate or joint venture to its interests in subsidiaries. These amendments have not yet been endorsed by the EU. It is not expected that these amendments would be relevant to the Bank.

IAS 1 Presentation of Financial Statements: Disclosure Initiative (Amendments)

The amendments are effective for annual periods beginning on or after 1 January 2016. The amendments to IAS 1 Presentation of Financial Statements further encourage com-panies to apply professional judgment in determining what information to disclose and how to structure it in their financial statements. They clarify, rather than significantly change, existing IAS 1 requirements. The amendments relate to materiality, order of the notes, subtotals and disaggregation, accounting policies and presentation of items of other comprehensive income (OCI) arising from equity accounted investments. The Bank is in the process of assessing the impact of these amendments on its financial statements.

IFRS 14 Regulatory Deferral Accounts

The standard is effective for annual periods beginning on or after 1 January 2016. The aim of this interim standard is to enhance the comparability of financial reporting by entities that are engaged in rate-regulated activities, whereby governments regulate the pricing of particular types of activity. This can include utilities such as gas, elec-tricity and water. The standard requires that the effect of rate regulation must be pre-sented separately from other items and grants exemption to IFRS first-time adopters. The standard has not been yet endorsed by the EU. As the Bank has adopted IFRS in prior periods and is not engaged in government regulated activities, it is not expected that the standard would be relevant to the Bank.

IFRS 15 Revenue from Contracts with Customers

The standard is effective for annual periods beginning on or after 1 January 2018. IFRS 15 establishes a five-step model that will apply to revenue earned from a contract with a customer (with limited exceptions), regardless of the type of revenue transaction or the industry. The standard’s requirements will also apply to the recognition and meas-urement of gains and losses on the sale of some non-financial assets that are not an output of the entity’s ordinary activities (e.g., sales of property, plant and equipment or intangibles). Extensive disclosures will be required, including disaggregation of total revenue; information about performance obligations and key judgments and estimates. The standard has not been yet endorsed by the EU. The Bank will analyse and assess the impact of the new standard on its financial position or performance.

IFRS 16 Leases

The standard is effective for annual periods beginning on or after 1 January 2019. IFRS 16 requires lessees to recognise most leases on their balance sheet and to have a single accounting model for all leases, with certain exemptions. Lessor accounting is substantially unchanged. The standard has not been yet endorsed by the EU. The Bank will analyse and assess the impact of the new standard on its financial position or performance.

IAS 27 Separate Financial Statements (Amended)

The amendment is effective from 1 January 2016. This amendment will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. It is not expected that this amendment would be relevant to the Bank.

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Amendments in IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets be-tween an investor and its associate or joint venture. A full gain or loss is recognised when a transaction involves a business or a partial gain or loss is recognised when a transaction involves assets that do not constitute a business. The amendments will be effective from annual periods commencing on or after 1 January 2016. The amend-ments have not yet been endorsed by the EU. It is not expected that these amendments would impact the financial position or performance of the Bank.

IAS 12 Income Taxes (Amendments): Recognition of Deferred Tax Assets for Unrealised Losses

The amendments are effective for annual periods beginning on or after 1 January 2017, with earlier application permitted. The objective of these amendments is to clarify the accounting for deferred tax assets for unrealised losses on debt instruments measured at fair value. For example, the amendments clarify the accounting for deferred tax as-sets when an entity is not allowed to deduct unrealised losses for tax purposes or when it has the ability and intention to hold the debt instruments until the unrealised loss reverses. These amendments have not yet been endorsed by the EU. It is not expected that these amendments would be relevant to the Bank.

IAS 7 Statement of Cash Flows (Amendments): Disclosure Initiative

The amendments are effective for annual periods beginning on or after 1 January 2017, with earlier application permitted. The objective of these amendments is to enable us-ers of financial statements to evaluate changes in liabilities arising from financing activi-ties. The amendments will require entities to provide disclosures that enable investors to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. These amendments have not yet been endorsed by the EU. It is not expected that these amendments would be relevant to the Bank.

Annual Improvements to IFRSs 2010–2012 Cycle

In the 2010–2012 annual improvements cycle, the IASB issued amendments to seven standards which are effective for annual periods beginning on or after 1 February 2015. A summary of amendments and related standards are provided below:

• IFRS 2 Share-based Payments – amended definitions of ‘vesting conditions’ and ‘market conditions’ and added the definitions of ‘performance condition’ and ‘service condition’;

• IFRS 3 Business Combinations – clarification on the accounting for contingent con-sideration arising from business combination;

• IFRS 8 Operating Segments – additional disclosures of management judgement on aggregating operating segments and clarification on reconciliation of total segments’ assets to the entity’s assets;

• IFRS 13 Fair Value Measurement – clarification on interaction with IFRS 9 as regards short-term receivables and payables;

• IAS 16 Property, Plant and Equipment – amended to a state that when an item of property, plant and equipment is revalued, the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount, while the accumulated depreciation is calculated as a difference between the gross carrying amount and the carrying amount after taking into account accumulated impairment losses;

• IAS 24 Related Party Disclosures – clarifies that a management entity that provides key management services to a reporting entity is deemed to be a related party; dis-closure of the service fee paid or payable is required;

• IAS 38 Intangible Assets – the same amendment as IAS 16 above.

The Bank is in the process of assessing the impact of the amendments on its financial statements.

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Annual Improvements to IFRSs 2012–2014 Cycle

In the 2012–2014 annual improvements cycle, the IASB issued amendments to four standards which are applicable for financial year 2016. A summary of amendments and related standards are provided below:

• IFRS 5 Non-current Assets Held for Sale and Discontinued Operations – clarification that changing from one of the disposal methods to the other (through sale or through distribution to the owners) should not be considered to be a new plan of disposal but a continuation of the original plan;

• IFRS 7 Financial Instruments: Disclosures – provides examples of continuing involve-ment in a financial asset and clarifies required disclosures in the condensed interim financial report;

• IAS 19 Employee Benefits – clarification on long-term liability discount rate determination;

• IAS 34 Interim Financial Reporting – clarification on required interim disclosures: they must either be in the interim financial statements or incorporated by cross-reference to other interim financial information (e.g., in the management report) that is available to users on the same terms and at the same time as the interim financial statements.

The Bank is in the process of assessing the impact of the amendments on its financial statements.

6. Financial Risk Management Policy Disclosure

(а) Introduction and overview

The Bank is exposed to the following types of risk in relation to the financial instruments operations:

• credit risk;

• liquidity risk;

• market risk;

• operational risk.

This note provides information on the Bank’s goals, exposures to each of the above types of risk and the policies and processes for risk measurement and management.

Generalprovisionsofriskmanagement

In the process of management of the gross international reserves, the Bank aims to achieve high security and liquidity of the assets, first, and then to maximise returns in the situation of the current global financial markets. Its investment strategy depends mainly on the specific function of a central bank operating under a currency board ar-rangement and in full compliance with the requirements of the Law on the BNB.

The major portion of BNB’s international reserves is invested in assets of very low credit risk, such as discount and coupon securities issued by highly rated issuers (govern-ments, government agencies or supranational financial institutions), and short-term foreign currency or gold deposits placed with first-rate foreign banks. The remaining portion is held in SDRs and in monetary gold kept in the Bank’s vaults.

The risks of international reserve management are handled by an independent risk management unit. It is directly responsible for strategic asset structuring and setting up benchmark for the international reserves, preparing and submitting investment man-agement limits for approval. On a quarterly basis, an overall review is made of the changes in the market conditions, the amount and structure of international reserves, and if required, the investment limits and model portfolios (benchmarks) are updated. The monitoring of underlying limits, rules, and procedures is undertaken on a daily basis. Reports are regularly prepared for both the needs of international reserves op-erating management and providing updated information to the Bank’s management.

All approved financial instruments and asset classes, in which the BNB may invest, are specified in internal documents. The documents define the main portfolios and the respective model portfolios (benchmarks), all limits for credit, interest rate, currency and operational risk, and give a list of the foreign financial institutions which are coun-terparties of the Bank.

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The international reserves management is governed by rules of behaviour and proce-dures regulating performance of the functions and tasks of the main structural units involved in the process.

(b) Credit risk

The BNB is exposed to credit risk through its trading operations and investment ac-tivities and in cases where it acts as an intermediary on behalf of the government or other public institutions. The Bank assumes credit risk also in operations of purchases and sales of foreign currency with banks. In general, this credit risk is associated with the probability of insolvency of a BNB’s counterparty or the insolvency of an issuer, in whose debt instruments the Bank has invested its own funds. The credit risk in man-aging BNB’s gross international reserves is assessed in line with the requirements in Article 28, paragraph 3 of the Law on the BNB. According to these requirements, the BNB may invest in debt instruments issued by foreign governments, central banks, other foreign financial institutions or international financial organisations whose debts are rated with one of the top two grades by two internationally recognised credit rating agencies and are payable in freely convertible currency in line with an internally devel-oped methodology as per the requirements of Article 28 of the LBNB.

According to these requirements, the approved types of financial instruments for invest-ment of funds in managing the international reserves are as follows:

• investment programmes with central banks;

• automatic borrowing/lending of securities with the main depository;

• deposits in foreign currency (time deposits and funds on current accounts) with BNB counterparties, including central banks or supranational financial institutions;

• deposits in gold (time deposits and funds on current accounts) with BNB counterpar-ties, including central banks or supranational financial institutions;

• commercial securities (of up to one year term to maturity), issued by governments or government guaranteed institutions, supranational financial institutions, specialised financial agencies, banks, and other financial institutions – issuers of European cov-ered bonds;

• ponds issued by governments or government guaranteed institutions, supranational financial institutions, specialised financial agencies, banks and other financial institu-tions – issuers of covered bonds. All bonds must be with a one-off payment of their face value on the maturity date and without any embedded option;

• purchases and sales of foreign currency with a value date of up to two business days.

Two basic types of limits are set which are calculated on the basis of the market value of foreign currency reserves: 1) a maximum or minimum limit on the weight of each as-set class, and 2) an individual maximum acceptable exposure of the BNB to an issuer/counterparty (concentration limit).

(c) Liquidity risk

Liquidity risk arises in the funding of the Bank’s core activities and in the management of positions. It is primarily manifested in two aspects: the first aspect is risk for the Bank of being unable to meet its obligations when due and the second aspect comprises the risk of its being unable to sell an asset on international markets at a fair value within an appropriate timeframe in compliance with the respective market conventions.

The BNB is striving to maintain a balance between the maturity of attracted funds and that of assets by means of investments in financial instruments of a different maturity structure. The instruments for attracting funds, which are provided to customers on the liability side, are primarily deposit/investment accounts and settlement accounts. The Bank maintains a minimum level of liquidity by type of currency on a daily basis to ensure all BNB payments in foreign currency. To better manage the risk arising from liquidation of positions in financial instruments, the latter are grouped by liquidity rank subject to the level of difficulty (i.e. discount from the fair value), at which they could be sold on the market in time of crisis. Limits are set for the different types of financial instruments based on the liquidity ranks.

As part of its overall liquidity risk management strategy, the Bank has defined require-ments for the management of a portfolio of liquid assets denominated in euro and for

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maintaining assets denominated in other currencies for the purposes of meeting its cash inflows and outflows.

The Bank’s financial assets and liabilities, analysed by residual term to maturity from the date of the statement of financial position to the date of any subsequent agreement or contractual maturity, are as follows:

(BGN’000)

up to 1 month

From 1 month to 3 months

From 3 months to

1 year

From 1 year to 5 years

over 5 years

undefined maturity

total

as of 30 June 2016

Financial assets

Cash and deposits in foreign currencies 8,819,449 1,453,830 911,417 - - - 11,184,696

Gold, instruments in gold, and other precious metals 2,334,320 704,308 - - - - 3,038,628

Financial assets at fair value through profit or loss 1,670,950 1,877,516 8,097,515 15,220,885 ,2,602,125 - 29,468,991

Financial assets available for sale 241,815 - - - - 2,025,418 2,267,233

other assets 20,447 23,177 29,312 - - - 72,936

Total financial assets 13,086,981 4,058,831 9,038,244 15,220,885 2,602,125 2,025,418 46,032,484

Financial liabilities

Banknotes and coins in circulation - - - - - 12,657,820 12,657,820

due to banks and other financial institutions 11,796,726 - - - - - 11,796,726

Liabilities to government institutions and other borrowings 2,253,914 - 10,858,501 - - - 13,112,415

Borrowings against Bulgaria’s participation in international financial institutions - - - - - 3,472,503 3,472,503

Total financial liabilities 14,050,640 - 10,858,501 - - 16,130,323, 41,039,464

Asset–liability maturity mismatch (963,659) 4,058,831 (1,820,257) 15,220,885 2,602,125 (14,104,905) 4,993,020

as of 31 december 2015

Financial assets

Cash and deposits in foreign currencies 7,483,584 2,174,003 1,223,579 - - - 10,881,166

Gold, instruments in gold, and other precious metals 1,490,144 - - - - 1,014,372 2,504,516

Financial assets at fair value through profit or loss 1,370,930 2,023,918 7,170,429 13,564,597 2,108,312 - 26,238,186

Financial assets available for sale 84,656 - - - - 1,563,154 1,647,810

other assets 15,973 5,438 49,075 - - - 70,486

Total financial assets 10,445,287 4,203,359 8,443,083 13,564,597 2,108,312 2,577,526 41,342,164

Financial liabilities

Banknotes and coins in circulation - - - - - 12,724,818 12,724,818

due to banks and other financial institutions 14,860,012 - - - - - 14,860,012

Liabilities to government institutions and other borrowings 3,364,990 21,514 3,190,570 - - - 6,577,074

Borrowings against Bulgaria’s participation in international financial institutions - - - - - 3,021,397 3,021,397

Total financial liabilities 18,225,002 21,514 3,190,570 - - 15,746,215 37,183,301

Asset–liability maturity mismatch (7,779,715) 4,181,845 5,252,513 13,567,597 2,108,312 (13,168,689) 4,158,863

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The outstanding contractual maturities of the Bank’s financial liabilities are as follows:(BGN’000)

Book valueGross nominal outgoing cash

flow

up to 1 month


From 3 months to 1 year

From 1 year to 5

years

over 5 years

as of 30 June 2016

Banknotes and coins in circulation 12,657,820 12,657,820 - - - - 12,657,820

due to banks and other financial institutions 11,796,726 11,796,726 11,796,726 - - - -

Liabilities to government institutions and other borrowings 13,112,415 13,163,137 2,254,651 - 10,908,486 - -

Borrowings against Bulgaria’s participation in international financial institutions 3,472,503 3,472,503 - - - - 3,472,503

41,039,464 41,090,186 14,051,377 - 10,908,486 - 16,130,323


Banknotes and coins in circulation 12,724,818 12,724,818 - - - - 12,724,818

due to banks and other financial institutions 14,860,012 14,860,012 14,860,012 - - - -

Liabilities to government institutions and other borrowings 6,577,074 6,577,449 3,364,989 21,514 3,190,945 - -

Borrowings against Bulgaria’s participation in international financial institutions 3,021,397 3,021,397 - - - - 3,021,397

37,183,301 37,183,676 18,225,001 21,514 3,190,945 - 15,746,215

(d) Market risk

Marketrisk

All financial instruments are subject to market risk, i.e. the risk of impairment as a result of changes in the market conditions. The instruments are evaluated on a daily basis at fair market value which best reflects current market conditions for the respective type of financial instrument. The Bank manages its portfolios in response to changing market conditions and to changes in the liability structure of Issue Department balance sheet. Market risk exposure is managed in accordance with the risk limits specified in the document Investment Limits for the Management of the Gross International Reserves.

The table below presents one important measure of market risk, i.e. Value at Risk (VaR). VaR is an indicator of the maximum loss over a certain period of time (holding period) and with a certain probability (called a confidence level or confidence interval). The VaR used in this report is based on a 95 per cent confidence level and a one-day hold-ing period.

To calculate the total risk, currency risk and interest rate risk, the empiric distributions, derived from time series of 30 daily observations of total income, currency income and interest income of assets, respectively, have been used. The correlation between the currency and interest rate risk is also presented. For each of the parameters, the value as of the last date for the period, the average value for the whole period and the mini-mum and maximum values have been calculated.

(BGN’000)

as of 30 June 2016 average Maximum Minimum

Currency risk (36,466) (30,284) (48,115) (20,150)

Interest rate risk (6,890) (9,034) (19,629) (2,329)

Correlation (per cent) 0.85 0.27 0.88 0.02

Overall risk (38,424) (32,391) (49,352) (20,643)

as of 31 december 2015 average Maximum Minimum

Currency risk (37,935) (34,449) (76,238) (15,379)

Interest rate risk (15,024) (18,863) (49,520) (3,688)

Correlation (per cent) 0.22 0.25 0.63 (0.23)

Overall risk (42,124) (49,320) (95,700) (10,145)

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Interestraterisk

The Bank’s operations are subject to the risk of interest rate fluctuations, which impact the prices of interest-earning assets (including investments) and interest-bearing li-abilities. The Bank uses modified duration as a key measurement for interest rate risk. Modified duration measures the effect of the change in the market value of an asset (liability) in percentage points in response to a 1 basis point (1/100th of 1 per cent) change in the interest rate levels. In addition, portfolios’ technical parameters such as protuberance (convexity), duration in a fixed point of the yield curve, etc. are monitored on a daily basis. For each portfolio held by the BNB, the interest rate risk is limited by a model portfolio (benchmark) and by the investment limits for a maximum deviation of the modified duration of the portfolio from that of the respective benchmark.

Assets and liabilities with floating interest rates involve the risk of changes in the base which serves to determine the interest rates.

(BGN’000)

totalFloating

rate instru-ments

Fixed rate instruments

up to 1 month


over 3 months

as of 30 June 2016

Interest-earning assets

Cash and deposits in foreign currencies 11,015,499 1,751,231 6,899,036 1,453,815 911,417

Gold, instruments in gold and other precious metals 1,810,040 - 1,105,823 704,217 -

Financial assets at fair value through profit or loss 29,581,526 68,490, 1,659,618 1,887,694 25,965,724

Financial assets available for sale 241,815 - 241,815 - -

other interest-earning assets 72,936 7,233 13,214 23,177 29,312

Total 42,721,816 1,826,954 9,919,506 4,068,903 26,906,453

Interest-bearing liabilities

due to banks and other financial institutions 11,796,726 - 11,796,726 - -

Liabilities to government institutions and other borrowings 10,863,354 - 5,285 - 10,324,069

Borrowings against Bulgaria’s participation in international financial institutions 1,505,393 1,505,393 - - -

Total 24,165,473 1,505,393 11,802,011 - 10,324,069

Interest-bearing asset/liability gap 18,556,343 321,561 (1,882,505) 4,068,903 16,582,384


Interest-earning assets

Cash and deposits in foreign currencies 10,663,614 1,794,489 5,471,609 2,173,937 1,223,579

Gold, instruments in gold and other precious metals 1,489,306 - 1,489,306 - -

Financial assets at fair value through profit or loss 26,279,180 88,014 1,375,552 2,023,481 22,792,133

Financial assets available for sale 84,659 - 84,659 - -

other interest-earning assets 70,486 6,646 9,327 5,438 49,075

Total 38,587,245 1,889,149 8,430,453 4,202,856 24,064,787

Interest-bearing liabilities

due to banks and other financial institutions 14,860,012 - 14,860,012 - -

Liabilities to government institutions and other borrowings 3,212,076 - - 21,514 3,190,562

Borrowings against Bulgaria’s participation in international financial institutions 1,516,547 1,516,547 - - -

Total 19,588,635 1,516,547 14,860,012 21,514 3,190,562

Interest-bearing asset/liability gap 18,998,610 372,602 (6,429,559) 4,181,342 20,874,226

For managing interest rate risk and the band of interest rate changes, the sensitivity of financial assets and liabilities to various standard and non-standard interest rate move-ment scenarios are monitored.

The standard scenarios include the following changes in yield curves: 1) a 100 basis points instant and parallel increase; 2) a 100 basis points instant and parallel decrease; 3) a 50 basis points parallel increase in the yield curves for a period of 12 months; and 4) a 50 basis points parallel decrease in the yield curves also for a period of 12 months. The second two scenarios assume that the change in yields takes place at the begin-ning of the period, and over the one-year period the yield curve remains unchanged.

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The analysis of the sensitivity of the Bank’s assets (to first approximation) to changes in interest rates, assuming a constant spread of assets and liabilities and parallel shifts in the yield curves of the relevant assets, is as follows:

(BGN’000)

100 b.p. instant parallel increase

100 b.p parallel decrease

50 b.p. parallel increase in the

beginning of the period

50 b.p. parallel decrease in the beginning of the

period

as of 30 June 2016 (626,743) 626,743 (279,467) (41,575)

as of 31 december 2015 (534,235) 534,235 (151,252) 31,199

Currencyrisk

For the Bank, a currency risk exists where there is a mismatch between the currency structure of assets and that of liabilities. From an accounting point of view, the Bank is exposed to currency risk when entering into transactions in financial instruments denominated in foreign currencies other than the euro.

With the introduction of the currency board arrangement in Bulgaria and the fixing of the Bulgarian currency to the euro, the Bank’s financial statements, prepared in Bulgarian levs, are affected by movements in the exchange rate of the lev against the currencies other than the euro.

To minimise currency risk, there is a limit to the mismatches between the currency structure of assets and that of liabilities. According to Article 31, paragraph 3 of the Law on the BNB, the total market value of assets in a foreign currency other than the euro, SDR and monetary gold, may not deviate by more than +/-2 per cent from the market value of the liabilities denominated in these currencies.

(BGN’000)

30 June 2016 31 december 2015

Assets

Bulgarian lev and euro 39,302,381 35,748,097

uS dollar 193,615 193,102

Japanese yen 209 170

Pound sterling 327 256

SdR 3,740,842 3,132,609

Gold 2,998,017 2,470,755

other 450 1,835

46,235,841 41,546,824

Liabilities, capital and reserves

Bulgarian lev and euro 42,409,963 38,328,006

uS dollar 193,175 191,940

Japanese yen 1 1

Pound sterling - 45

SdR 3,631,807 3,022,929

other 895 3,903

46,235,841 41,546,824

Net position

Bulgarian lev and euro (3,107,582) (2,579,909)

uS dollar 440 1,162

Japanese yen 208 169

Pound sterling 327 211

SdR 109,035 109,680

Gold 2,998,017 2,470,755

other (445) (2,068)

(e) Using accounting judgements and assumptions

The Governing Council discusses the development, selection and disclosure of critical accounting policies and assumptions, as well as their application.

These disclosures supplement the notes to the financial risk management.

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The Bank is operating in a complicated global economic and financial environment which also affects the Bulgarian market and could have negative implications for the Bank’s performance and risk. Management has already taken measures, and its major priorities in the next few years will still be to keep the Bank’s stable liquidity position and the continuous improvement in its evaluation methods, international reserves qual-ity control and management.

(i) Determinationoffairvalues

The determination of fair values of financial assets and liabilities for which there is no observable market price requires the use of valuation techniques described in the accounting policy. For financial instruments that trade infrequently and whose price is not transparent, the fair value is less objective and requires an expert’s judgement depending on liquidity, concentration, market factors uncertainty, pricing assumptions, and other risks affecting the particular instrument.

(ii) Valuationoffinancialinstruments

The Bank measures the fair value of financial instruments using the following hierarchy of methods:

• Level 1: A quoted market price or closing price for positions for which there is a reli-able market;

• Level 2: Valuation techniques based on observable market information about the yield curve. This category of methods is used to measure debt securities for which there is no reliable market.

• Level 3: Valuation techniques, where inputs on financial assets and liabilities are not based on observable market data.

The fair values of financial assets and liabilities traded in international financial mar-kets for which there is available market information are based on market quotations or closing market prices. The use of observable market prices and information reduces the need for management judgement and estimation and also reduces the uncertainty associated with determination of fair values. The availability of actual market prices and information varies depending on products and markets and changes because of spe-cific events and the general conditions of financial markets. The Bank determines the fair values of all other financial instruments for which there are no current market quotes by using a valuation technique based on a net present value. The net present value is computed by means of market yield curves and credit spreads, where necessary, for the relevant instrument. The purpose of the valuation techniques is to determine a fair value which reflects the price of the financial instrument on the reporting date.

The Bank has established a control framework with respect to the measurement of fair values. The fair values of financial instruments controls are set by an independent risk analysis and control unit. Specific controls include: checking the actual price infor-mation; regular reviews of current valuation models and, if necessary, development, approval and introduction of new valuation models; follow-up verification by means of analysis and comparison of data from various information sources, etc.

The table below analyses financial instruments reported at fair value using valuation models. The data does not include equity instruments reported at acquisition cost (note 14).

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(BGN’000)

Level 1 Market quotes in active

markets

Level 2 valuation techniques using

market datatotal

30 June 2016

Cash and deposits in foreign currency 11,184,696 - 11,184,696

Gold, instruments in gold and other precious metals 3,038,628 - 3,038,628

Financial assets at fair value through profit or loss 28,030,608 1,438,383 29,468,991

Total 42,253,932 1,438,383 43,692,315

31 december 2015

Cash and deposits in foreign currency 10,881,166 - 10,881,166

Gold, instruments in gold and other precious metals 2,504,516 - 2,504,516

Financial assets at fair value through profit or loss 24,323,579 1,914,607 26,238,186

Total 37,709,261 1,914,607 39,623,868

Financial instruments not measured at fair value, but by applying a level of the fair value hierarchy where a fair value measurement is categorised, are analysed in the table below: (BGN’000)

Level 1 Market quotes in active

markets

Level 2 observable inputs other than

quoted pricestotal

30 June 2016

due to banks and other financial institutions - 11,796,726 11,796,726

Liabilities to government institutions and other borrowings - 13,112,415 13,112,415

Borrowings against Bulgaria’s participation in international financial institutions - 3,472,503 3,472,503

Total - 28,381,644 28,381,644

31 december 2015

due to banks and other financial institutions - 14,860,012 14,860,012

Liabilities to government institutions and other borrowings - 6,577,074 6,577,074

Borrowings against Bulgaria’s participation in international financial institutions - 3,021,397 3,021,397

Total - 24,458,483 24,458,483

The fair value of due to banks and other financial institutions and of liabilities to govern-ment institutions is approximately equal to the reporting value as they are short-term.

The fair value of the liabilities for participation in international financial institutions is approximately equal to their reporting value as they are interest-free and of no definite maturity.

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7. Interest Income and Expense (BGN’000)

30 June 2016 30 June 2015

Interest income

– securities 190,672 196,958

– deposits 14,518 4,952

– other 1 1

205,191 201,911

Interest expenses

– deposits 7,751 2,747

– other - 7

7,751 2,754

As at 30 June 2016 there were no interest expenses paid on government and other organisations’ deposits either in BGN or in foreign currencies.

Interest income on deposits comprise: BGN 6132 thousand interest on deposits in for-eign currency with foreign correspondent banks and BGN 8026 thousand interest under Article 6 of Ordinance No 21 on the Minimum Required Reserves Maintained with the BNB by Banks (Ordinance No 21 of the BNB)

Interest expenses paid on deposits include interest paid of BGN 5378 thousand (30 June 2015: BGN 1936 thousand) on deposits with foreign correspondent banks as a result of using negative reference interest rates.

In addition BGN 279 thousand (30 June 2015: BGN 104 thousand) interest paid on the technical account of the national system component TARGET2-BNB at the ECB are included.

During the year, the ECB Governing Council continued to set negative interest rates for the Eurosystem’s deposit facility and during most of the reporting period the interest rate was fixed at -0.40 per cent.

8. Net Gains/(Losses) from Financial Assets and Liabilities Entered at Fair Value in the Profit and Loss

(BGN’000)

30 June 2016 30 June 2015

net (losses) from operations in securities (168,246) (209,751)

net gains from operations in foreign currency 402 198

net revaluation gains/(losses) on futures 141 (220)

net revaluation gains/(losses) on securities 206,780 (101,601)

net revaluation (losses)/gains on foreign currency assets and liabilities (810) 4,338

net revaluation gains on gold 529,127 194,986

567,394 (112,050)

Net losses from financial assets and liabilities carried at fair value through profit or loss as at 30 June 2016 are largely attributable to operation with investments of BGN 168,246 thousand. The main factor is the lower market yields on securities from their coupon yield which led to be traded at premium above their face value.

During the period the market yield on the securities in which BNB primary invests re-corded a significant decline for all issuers and maturity sectors by 15 to 80 basis points. The net effect from revaluation of securities consequence due to these movements was positive: BGN 206,780 thousand.

As of 30 June 2016 net gains from gold revaluation amounted to BGN 529,127 thousand and was largely due to the increase in the market price of gold in euro of about 21 per cent: from BGN 1911.36 per troy ounce as of 31 December 2015 to BGN 2314.90 as of 30 June 2016.

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9. Other Operating Income (BGN’000)

30 June 2016 30 June 2015

Income from subsidiaries 16,745 12,951

Income from associated companies - -

Income from sale of coins 291 240

dividend income 7,870 10,165

other income, net 857 1,509

25,763 24,865

Dividend income includes dividends from BNB’s participation in: BIS Basle amount-ing to BGN 4239 thousand, BORICA-Bankservice of BGN 3453 thousand, and Cash Service Company AD of BGN 178 thousand.

The BNB received a dividend payment of BGN 23,524 thousand from its participation in Printing Works Corp. which is eliminated for the purpose of the consolidated financial statement.

The other net incomes include financial incomes from subsidiaries of BGN 208 thou-sand, incomes from reallocated remuneration from the ECB in relation to TARGET2 of BGN 428 thousand, rental income of BGN 123 thousand, income from penalties of BGN 98 thousand.

10. General Administrative Expenses (BGN’000)

30 June 2016 30 June 2015

Personnel costs 17,172 15,868

administrative expenses 27,537 18,835

depreciation 8,897 9,065

other expenses 2,297 2,162

55,903 45,930

Bank and its subsidiaries is 1141 as of 30 June 2016 (30 June 2015: 1144), including the BNB staff of 853 as of 30 June 2016 (30 June 2015: 854).

Personnel costs include salaries, social and health insurance costs charged under the local legislation provisions as of 30 June 2016, and social activities costs, respectively for the BNB: BGN 13,772 thousand (30 June 2015: BGN 12,698 thousand), for the Printing Works of the BNB Corp.: BGN 2067 thousand (30 June 2015: BGN 1887 thou-sand), and for the Bulgarian Mint EAD BGN 1333 thousand (30 June 2015: BGN 1283 thousand).

Based on actuarial calculations, the Bank has accrued compensation liabilities for personnel on retirement and for unused paid annual leave at BGN 1724 thousand (30 June 2015: BGN 1448 thousand). The retirement and unused paid annual leave compensation for the Bank’s subsidiaries as of 30 June 2016 are BGN 79 thousand (30 June 2015: BGN 59 thousand).

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Staff retirement liabilities calculated based on actuarial valuation and pursuant to IAS 19 ‘Employee Benefits’ are given below:

(BGN’000)


Defined benefit liabilities as at 1 January 2,424 2,178

Plan benefits paid (62) (354)

Current service costs 145 227

Interest costs 22 60

Re-measurements - ,60

actuarial (gain)/loss arising from experience adjustment (73) 19

actuarial (gain)/loss arising from change in demographic assumptions

- ,-

actuarial (gain)/loss arising from change in financial assumptions

95 ,231

actuarial gains recognised in expenses 2 3

Defined benefit liabilities as at 30 June 2,553 2,424

Costscarriedthroughprofitandloss (BGN’000)


Current service costs 145 227

Interest costs 22 60

actuarial losses 2 3

effect from change of plan - 60

Total 169 350

ActuarialAssumptions

The key actuarial assumptions as at the Financial Statements date are the following (weighted average): (%)


discount interest rate as at 30 June 1.96 1.82

Future salary growth 4.5 3.50

Administrative expenses include the BNB’s currency circulation expenses of BGN 11,548 thousand as of 30 June 2016 (30 June 2015: BGN 4270 thousand).

11. Cash and Deposits in Foreign Currencies (BGN’000)


Cash in foreign currencies 170 055 217 335

Current accounts in other banks 1 749 088 1 789 066

deposits in foreign currencies 9 265 553 8 874 765

11 184 696 10 881 166

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Cash and deposits in foreign currencies with correspondents are disclosed as follows:

(BGN’000)


euro area residents

In euR 3,892,060 2,957,377

In other currencies 2 2

3,892,062 2,957,379

non-euro area residents

In euR 5,590,913 6,210,115

In other currencies 1,701,721 1,713,672

7,292,634 7,923,787

11,184,696 10,881,166

12. Gold, Instruments in Gold and Other Precious Metals

30 June 2016 31 december 2015’000 troy ounces

BGn’000’000 troy ounces

BGn’000

Gold bullion in standard form 513 1,187,643 513 980,610

Gold deposits in standard form 782 1,810,374 780 1,490,145

Gold in other form 16 37,172 16 30,748

other precious metals 3,439 3,013

3,038,628 2,504,516

Gold in standard form includes gold held for safekeeping with a depository and de-posits. Deposits in gold are held with banks whose liabilities are rated with one of the two highest ratings given by two internationally recognised rating agencies and bear interest between 0.15 per cent and 1.25 per cent annually.

Gold in other form includes commemorative gold coins of BGN 31,364 thousand.

Other precious metals include silver commemorative coins of BGN 465 thousand and platinum commemorative coins of BGN 2792 thousand.

13. Financial Assets at Fair Value through Profit and Loss (BGN’000)

Securities at fair value through profit or loss 30 June 2016 31 december 2015

Foreign treasury bills, notes and bonds 29,468,991 26,238,186

29,468,991 26,238,186

Securities comprise of both coupon and discount securities denominated in EUR. The maximum coupon interest of the EUR-denominated securities was 1.59 per cent as of 30 June 2016 (31 December 2015: 1.81 per cent).

Similarly as at 31 December 2015, as at 30 June 2016 there were no securities pledged as collateral on futures transactions.

The securities issued by foreign governments and other issuers or relevant issuers with credit rating graded by at least two of the six internationally recognised credit rating agencies – Standard&Poor’s, Fitch Ratings, Moody’s, DBRS, R&I and JCRA are disclosed as follows:

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(BGN’000)

Issuer’s credit rating 30 June 2016 31 december 2015

Investment graded securities by the issue/issuer credit rating

ААА 15,725,688 14,772,152

АА+ 3,270,686 2,566,941

АА 127,753 279,626

AA- 7,020,527 5,958,588

А+ 3,324,337 2,660,879

29,468,991 26,238,186

14. Financial Assets Available for Sale (BGN’000)


Republic of Bulgaria’s quota in the IMF 2,208,770 1,589,348

equity investments in international financial institutions 31,682 31,681

Investments in associates 26,781 26,781

2,267,233 1,647,810

The Republic of Bulgaria’s quota in the IMF is SDR 896,300 thousand (31 December 2015: SDR 640,200 thousand). The increase of SDR 256,100 thousand is due to the contribution made by Bulgaria to implement its quota increase in the IMF agreed under the 14th General Quota Review.

BGN 241,815 thousand of the Republic of Bulgaria’s quota in the IMF represents the reserve tranche held with the IMF (31 December 2015: BGN 84,659).

The IMF pays remuneration (interest) to those members who have a remunerated re-serve tranche position, at an average rate of 0.047 per cent.

Equity investments in international financial institutions include the equity investment in the Bank for International Settlements (BIS), Basel. Twenty-five per cent of the equity investment in BIS Basel is paid up. The current value of these shares is SDR 10,000 thousand, which as at 30 June 2016 equals BGN 24,826 thousand (as at 31 December 2015: BGN 24,826 thousand – ref. note 28). The capital subscribed, but not paid-in has an option to be paid in within three months upon a decision of the BIS Board of Governors.

Equity investments in international financial institutions do not exceed 10 per cent of the subscribed share capital of the respective institution.

Investments in international financial institutions also include BNB’s participation in the ECB. As of 1 January 2007 (when the Republic of Bulgaria joined the EU), the Bulgarian National Bank has a share in the ECB capital. As at 30 June 2016 the amount of the BNB paid-up share in the ECB capital is EUR 3487 thousand or BGN 6820 thousand.

Pursuant to Article 28 of the Statute of the European System of Central Banks and the ECB (Statute of the ESCB and the ECB), only ESCB NCBs are entitled to participate in the ECB capital. Capital subscription follows the requirements and the key set forth in Article 29 of the Statute of the ESCB and ECB; i.e. the share of each NCB in the ECB capital is determined in percentage and corresponds to the share of the respective Member State in the EU’s total population and GDP (in equal proportions). The percent-age is adjusted every five years and whenever a new Member State joins the EU. As at 31 December 2015, the BNB’s capital share in the ECB subscribed capital is 0.8590 per cent, which corresponds to EUR 92,986.8 thousand.

As a non-euro area NCB, the BNB is required to pay up the minimum percentage of its subscribed capital in the ECB, which is pursuant to Article 47 of the Statute of the ESCB and ECB (as set out by the ECB General Council) and represents the BNB contribution to the ECB operational costs. As of 29 December 2010 this percentage amounts to 3.75 per cent. Unlike Eurosystem NCBs, the BNB is not entitled to the ECB’s distributable profit, nor is it required to fund any loss of the ECB. Upon joining the euro area, the BNB will be required to pay up the remaining 96.25 per cent of its capital subscription to the ECB, which is EUR 89,499.8 thousand.

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The Bank exercises significant influence on the financial and operational policies of the associated companies listed below, and its investments in domestic companies can be analysed as follows:

associated companiesShare holding,

per centPrincipal activity

BoRICa–Bankservice ad 36.11 Interbank card payments

International Bank Institute ood 44.23 Financial training and research

Cash Services Company ad 20.00 Handling of sealed parcels of Bulgarian coins and banknotes transferred from the BnB and the banks

15. Tangible Assets

The fair value of land and buildings is categorised as Level-3 fair value based on the input data for the given assessment technique.

For the remaining asset classes Plant and Machinery, Equipment, Vehicles, Fixtures and Fittings, the fair value is considered to be their present value on the Bank’s balance sheet as most of them were bought in the last four years and their book value is close to their fair value.

When revaluating tangible fixed assets the Bank derecognises the accrued deprecia-tion at the expense of the gross book value of the assets and their net value is recal-culated against the revalued amount.

(BGN’000)

Land and buildings

Plant and equipment

It equip-ment

office equipment

other equipment

(includ-ing motor vehicles)

tangible assets in progress

total

as of 1 January 2016 181,171 89,655 47,082 9,780 8,275 2,712 338,675

additions - 112 10 16 144 991 1,273

disposals - (117) (7) (9) - (383) (516)

transfers - 843 4 7 - (854) -

as of 30 June 2016 181,171 90,493 47,089 9,794 8,419 2,466 339,432

Depreciation and Impairment loss

as of 1 January 2016 (44,935) (67,685) (39,119) (8,187) (6,085) - (166,011)

Charge for the period (2,811) (2,546) (2,053) (308) (249) - (7,967)

on disposals - 117 7 9 - - 133

as of 30 June 2016 (47,746) (70,114) (41,165) (8,486) (6,334) - (173,845)

Net book value as of 30 June 2016 133,425 20,379 5,924 1,308 2,085 2,466 165,587

Net book value as of 31 December 2015 136,236 21,970 7,963 1,593 2,190 2,712 172,664

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(BGN’000)

Land and buildings

Plant and equipment

It equip-ment

office equipment

other equipment

(includ-ing motor vehicles)

tangible assets in progress

total

as of 1 January 2015 181,149 87,059 43,135 9,864 7,398 3,463 332,068

additions 22 1262 14 23 69 7,983 9,373

disposals - (453) (1,782) (151) (380) - (2,766)

transfers - 1,787 5,715 44 1,188 (8,734) -

as of 31 december 2015 181,171 89,655 47,082 9,780 8,275 2,712 338,675

Depreciation and impairment loss

as of 1 January 2015 (39,289) (62,687) (36,898) (7,532) (6,074) - (152,480)

Charge for the period (5,646) (5,450) (3,995) (796) (390) - (16,277)

on disposals - 452 1,774 141 379 - 2,746

as of 31 december 2015 (44,935) (67,685) (39,119) (8,187) (6,085) - (166,011)

Net book value as of 30 June 2015 136,236 21,970 7,963 1,593 2,190 2,712 172,664

Net book value as of 31 December 2014 141,860 24,372 6,237 2,332 1,324 3,463 179,588

In applying IAS 16 Property, Plant and Equipment and BNB’s Internal Rules for Financial Statements and Accounting Policy, as at December 2013 a review was made of the book value of tangible fixed assets stated in the Bank’s balance sheet. The fair value of land and buildings was determined by an external, independent and licensed as-sessor of recognised professional qualification and experience in assessing property of location and category similar to the assessed ones. As at 31 December 2015, the fair value of land and buildings did not differ materially from their book value as at the same date; therefore, it is considered that the present book value of land and buildings on the Bank’s balance sheet fairly reflects their market value.

16. Intangible Assets(BGN’000)

Softwareother intangi-

ble assetsdevelopment

coststotal

as of 1 January 2016 49,011 161 247 49,419

additions - - 72 72

disposals (4) - - (4)

transfers 52 - (52) -

as of 30 June 2016 49,059 161 267 49,487


as of 1 January 2016 (44,973) (157) - (45,130)

Charge for the period (929) (1) - (930)

on disposals 4 - - 4

as of 30 June 2016 (45,898) (158) - (46,056)

Net book value as of 30 June 2016 3,161 3 267 3,431

Net book value as of 31 December 2015 4,038 4 247 4,289

As of 30 June 2016 no licences have been purchased for the BNB (31 December 2015: BGN 1401 thousand). Software products purchased amounted to BGN 72 thousand (31 December 2015: BGN 1320 thousand).

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(BGN’000)

Softwareother intangi-

ble assetsdevelopment

coststotal

as of 1 January 2015 46,544 161 115 46,820

additions 11 - 2,721 2,732

disposals (133) - - (133)

transfers 2,589 - (2,589) -

as of 31 december 2015 49,011 161 247 49,419


as of 1 January 2015 (43,174) (155) - (43,329)

Charge for the period (1,932) (2) - (1,934)

on disposals 133 - - 133

as of 31 december 2015 (44,973) (157) - (45,130)



Software includes, as of 31 December 2015, licenses purchased by the BNB to the total amount of BGN 1401 thousand (31 December 2014: BGN 365 thousand), and software products to the amount of BGN 1320 thousand (31 December 2014: BGN 694 thousand).

17. Other Assets (BGN’000)


Cash held by subsidiaries with local banks 72,969 70,510

Investments of subsidiary undertakings in joint ventures and associates 8,791 6,091

Commemorative coins for sale 306 309

Inventories 17,242 16,963

accounts receivable 2,176 1,484

deferred charges 1,205 1,892

other receivables 4,586 944107,275 98,193

Cash held by subsidiaries with local banks comprise BGN 65,722 thousand of BNB Printing Works Corp. and BGN 7247 thousand of Bulgarian Mint EAD.

Investments of subsidiary undertakings in joint ventures and associates include a non-monetary contribution in the form of banknote production equipment to the capital of François-Charles Oberthur Group with which BNB Printing Works Corp. has established a joint venture for banknote production.

18. Currency in circulation (BGN’000)


Banknotes in circulation 12,388,891 12,470,856

Coins in circulation 268,929 253,962

12,657,820 12,724,818

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19. Liabilities to Banks and Other Financial Institutions (BGN’000)


demand deposits from banks and other financial institutions

- in BGn 7,867,952 11,464,908

- in foreign currency 3,928,774 3,395,104

11,796,726 14,860,012

The Bank does not pay interest on demand deposits from banks and other financial institutions. Demand deposits include BGN 5,469,259 thousand representing the re-quired reserves, which all local banks are required to maintain on accounts with the BNB (31 December 2015: BGN 5,885,977 thousand).

On 26 November 2015 the Governing Council of the Bulgarian National Bank adopt-ed a new Ordinance No 21 on the Minimum Required Reserves Maintained with the Bulgarian National Bank which came into force as of 4 January 2016. The new BNB Ordinance No 21 removed the recognition of banks’ funds in the TARGET2-BNB national system component as a component of reserve assets.

20. Liabilities to Government Institutions and Other Borrowings (BGN’000)


Current accounts:

- in BGn 2,098,413 1,833,548

- in foreign currency 150,648 1,531,450

time deposit accounts:

- in BGn 5,275,000 2,534,000

- in foreign currency 5,588,354 678,076

13,112,415 6,577,074

The government’s deposits and current accounts with the Bank comprise funds held on behalf of state budget and other government organisations. As of 4 January 2016 the Bank shall apply interest rates in line with the General Terms and Conditions of the Bulgarian National Bank on accepting cash deposits and servicing bank ac-counts, budget organisations and other customers adopted by a decision of the BNB Governing Council of 26 November 2015.

21. Liabilities against Participations in International Financial Institutions

The borrowings against Bulgaria’s participation in the IMF as of 30 June 2016 amount to BGN 1,961,489 thousand, or SDR 795,956 thousand (as of 31 December 2015: BGN 1,500,715 thousand, or SDR 604,475 thousand).

Borrowings from the IMF are denominated in SDRs. Borrowings related to Bulgaria’s quota in the IMF are non-interest bearing with no stated maturity. This note includes account No 1 and account No 2 of the IMF in levs amounting to BGN 5495 thousand (as of 31 December 2015: BGN 4008 thousand).

The Bank’s borrowings from the IMF of the general and special allocation of SDRs amount to SDR 474,586,534 and SDR 136,289,102, respectively. Repayment will take place on IMF’s demand. Under Article XX of IMF Statute, the Bank receives interest on the existing SDRs and pays a fee on its borrowings from the general and special al-location at the same interest rate.

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22. Other Liabilities(BGN’000)


Funds of eu institutions and bodies 77,881 98,463

Salaries and social security payable 4,860 3,474

deferred income 553 1,408

other liabilities 175,865 40,092259,159 143,437

‘Funds of EU institutions and bodies’ include European Commission’s funds. Pursuant to Article 9 of Council Regulation No 1150 of 2000 and Bulgaria’s participation in the funding of the EU budget, the Bank opened accounts of the European Commission. As at 30 June 2016 the funds on these accounts were BGN 77,881 thousand.

23. Capital and Reserves

The capital of the Bank is determined by the Law on the BNB and amounts to BGN 20,000 thousand.

Non-monetary asset revaluation reserves comprise the net change in fair value of prop-erty, equity investments and other non-monetary assets.

Pursuant to Article 36 of the Law on the Bulgarian National Bank, unrealised gains/losses arising from the revaluation of assets and liabilities denominated in foreign cur-rencies or gold are transferred to a special reserve account and form special reserves.

Other reserves include the transfers to reserves of 25 per cent of the annual excess of revenue over expenditure after the allocation to special reserves, upon a decision of the BNB Governing Council.

As of 30 June 2016 profit distribution in accordance with the profit distribution policy disclosed in note 5 (h) is as follows:

(BGN’000)

30 June 2016 30 June 2015

Profit for the period 737,901 68,561allocation to special reserve under article 36 of the Law on the BnB

unrealised (gain) from gold revaluation (529,127) (194,986)

unrealised (gain)/loss from revaluation of financial assets at fair value through profit or loss (196,814) 177,021unrealised loss/(gain) from foreign currency valuation 810 (4,338)other unrealised (gain) (141) -

result after allocation to special reserve 12,629 46,258

24. Non-controlling Interest

BNB Printing Works Corp. is a joint-stock company with two shareholders: the BNB and the State represented by the Ministry of Finance. The BNB holds 95.6 per cent of the company’s capital and the State represented by the Ministry of Finance holds the remaining 4.4 per cent of the company’s capital.

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25. Monetary Liabilities and Gross International Foreign Exchange Reserves (BGN’000)


gross international reserves

Cash and deposits in foreign currencies 11,184,696 10,881,166

Monetary gold and other instruments in gold 2,998,017 2,470,755

Security investments 29,468,991 26,238,186

equity investments and quota in the IMF 241,815 84,659

43,893,519 39,674,766

Monetary liabilities

Currency in circulation 12,657,820 12,724,818

due to banks and other financial institutions 11,776,619 14,776,742

Liabilities to government institutions 12,198,628 5,978,548

other liabilities 1,011,775 780,258

37,644,842 34,260,366

Surplus of gross international reserves over monetary liabilities 6,248,677 5,414,400

Interest receivable and interest payable are carried to the relevant financial assets and liabilities.

Monetary gold and other instruments in gold are revalued on a daily basis based on the euro fixing of the London Bullion Market closing price.

26. Related Party Transactions

Bulgarian Government

InternationalMonetaryFund

As of 30 June 2016, the Republic of Bulgaria has not received funds under IMF agreements.

The Republic of Bulgaria’s quota in the IMF is secured by promissory notes jointly signed by the Bank and the Government (ref. note 21).

Governmentbankaccounts

Government budget organisations have current accounts and time deposits with the Bank (ref. note 20).

Fiduciaryactivities

In accordance with the Law on the BNB and under the terms agreed upon with the Minister of Finance, the BNB acts as an agent in government or government-guaran-teed debts. With regard to this role, the BNB performs agent and central depository services related to the administration and management of government securities is-sued by the Ministry of Finance. The Bank receives commission for providing these services. These government securities are not assets or liabilities of the BNB and are not recognised in its consolidated statement of financial position. The Bank is not ex-posed to any credit risk relating to government securities as it does not guarantee them. As of 30 June 2016, the par value of the government securities held in custody was BGN 6928 million (31 December 2015: BGN 7283 million).

27. Subsidiaries(%)

ownership interest 30 June 2016 31 december 2015

Bulgarian Mint ead 100 100

Printing Works of the BnB Corp (ref. note 24) 95.6 95.6

The net income from subsidiaries for the period comprises net profit of BGN 518 thou-sand from the Bulgarian Mint EAD (30 June 2015: BGN 219 thousand) and BGN 3120 thousand from the Printing Works of the BNB Corp. (30 June 2015: BGN 2050 thousand).

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28. Commitments and Contingencies

(i) ParticipationintheBankforInternationalSettlements

The Bank holds 8000 shares of the capital of BIS, Basеl, each amounting to SDR 5000. Twenty-five per cent of the equity investment in BIS, Basle is paid up. The capital sub-scribed but not paid in is with an option to be paid in within three months following a decision of the BIS Board of Governors. The contingent amount as of 30 June 2016 is BGN 74,477 thousand (31 December 2015: BGN 74,477 thousand).

(ii) MFquotaandborrowings

The IMF quota is secured by promissory notes jointly signed by the Bank and the Government of the Republic of Bulgaria amounting to BGN 1,942,565 thousand.

(iii)Capitalcommitments

As of 30 June 2016 the Bank has committed to BGN 851 thousand to purchase non-current assets (31 December 2015: BGN 374 thousand).

(iv)Othercommitmentsandliabilities

There are no other outstanding guarantees, letters of credit or commitments to pur-chase or sell either gold, other precious metals or foreign currency.

29. Events Occurred after the Reporting Date

There are no events after the reporting date that require additional disclosure or adjust-ments to the Bank’s Financial Statements.

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Major R

esolutions of the BN

B G

overning C

ouncil betw

een 1 January and 30 June 2016

21 January The Governing Council approved Ordinance No 30 on Calculation of the Premium Con-tributions Due by Banks under the Law on Bank Deposit Guarantee.

The Governing Council refused to grant a licence for conducting operations as an elec-tronic money institution to Cash Credit EAD.

10 February The BNB Governing Council decided to close the preliminary stage of the assessment of assets in the Bulgarian banking system and to publish guidelines on the organisation and management of the project and on ensuring the use of ECB’s asset quality review methodology.

The BNB Governing Council decided to put into circulation, as of 28 March 2016, a silver commemorative coin ‘140 Years since the April Uprising’ with a nominal value 10 levs, issue 2016.

21 March The BNB put into circulation, as of 18 April 2016, a copper commemorative coin ‘150 Years since the Birth of Pencho Slaveikov’ of the Bulgarian Artists series with a nominal value 2 levs, issue 2016.

31 March The BNB Governing Council approved the BNB Budget Implementation as of 31 Decem-ber 2015.

The total amount of the banking system contribution to the Bank Resolution Fund for 2016 was set at BGN 95,687,327.

In compliance with Article 5, paragraph 3 and paragraph 4 of Ordinance No 8 of the BNB on Banks’ Capital Buffers, the countercyclical buffer rate applicable to credit risk exposures in the Republic of Bulgaria was set at 0 per cent for the second quarter of 2016.

11 April The BNB Governing Council approved the Annual Report of the Bulgarian National Bank for 2015.

The BNB Governing Council issued a license for conducting operations as an electronic money institution to Credibul EAD under Article 77, paragraph 1 of the Law on Payment Services and Payment Systems.

27 April Pursuant to Article 139, paragraph 2 of the Law on the Recovery and Resolution of Credit Institutions and Investment Firms, the BNB Governing Council set the 2016 amount of individual annual contributions of banks and branches of third country banks to the Bank Resolution Fund calculated according to a methodology adopted by the BNB Governing Council on 31 March 2016.

Under § 14 of Ordinance No 30 of 2016 on Calculation of the Premium Contributions Due by Banks under the Law on Bank Deposit Guarantee, the BNB Governing Council adopted Guidelines on Provision of Information under Article 23 of Ordinance No 30 of the BNB on Calculation of the Premium Contributions Due by Banks under the Law on Bank Deposit Guarantee.

Major Resolutions of the BNB Governing Council between 1 January and 30 June 2016

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The BNB Governing Council took note of proposed macroeconomic scenarios and 2016 stress test guidelines.

The BNB Governing Counci l adopted a draf t Ordinance on the Organisation and Control over Ensuring Security of Banks and Financial Institutions, prepared jointly with the Ministry of Interior.

The BNB Governing Council decided to put into circulation on 20 June 2016 a silver commemorative coin ‘150 Years since the First Railroad in Bulgaria: Ruse – Varna’ with a nominal value 10 levs, issue 2016.

19 May The BNB Governing Council licensed Easy Payment Services EOOD (incorporation underway) to provide payment services under Law on Payment Services and Payment Systems Article 4, item 4b and item 5 for payment cards and similar transactions where the funds are covered by a credit line to a payment service user, and to issue payment instru-ments and/or accept payments via payment instruments.

16 June Under Article 5, paragraphs 3 and 4 of BNB Ordinance No 8 on Banks’ Capital Buffers, the BNB Governing Council set the countercyclical capital buffer rate applicable to credit risk exposures in the Republic of Bulgaria at 0 per cent for the third quarter of 2016.

The Governing Council adopted a decision stating that as of 1 July 2016 the Bulgarian National Bank shall publish the exchange rate of the Bulgarian Lev to BNB-selected foreign currencies on each business day for the Republic of Bulgaria by 6 p.m. Bulgarian time.

30 June Under the Currency Law Article 7, paragraph 11, Article 8, paragraph 4 and Article 10, paragraph 4 and the Law on the Bulgarian National Bank Article 42, the BNB Governing Council adopted an Ordinance on Amendment of BNB Ordinance No 27 of 13 March 2014 on the Balance of Payments Statistics, International Investment Position and Securities Statistics.

report • january – june 2016...tion. employment growth accelerated to 1.2 per cent on an annual...

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