Bulgaria - Deposit Insurance Contingency Financing Project

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A vibrant private sector has helped improve economic performance in Bulgaria above expectations; this has been also supported byimprovements in the fiscal position. GDP growth accelerated to 3.7% in 2016-18, due in part to a dynamic export sector which tookadvantage of improving external conditions and an expanded share in global trade. Fiscal accounts ran a surplus in 2016-18 as aresult of improved revenue collection and slower implementation of EU funded public investment. Tax revenues reached 30% of GDP in2018, up by 1.1 percentage point of GDP compared to 2015 thanks to strong economic activity, better compliance, and higher minimumwages. Prudent fiscal policy contributed to substantial reduction in public debt levels, and an upgrading by S&P at the end of 2017of Bulgaria’s long-term credit rating to investment grade (BBB-), while Fitch raised the credit rating from BBB- to BBB+. Thebanking system is primarily foreign owned, although with a sizeable domestically owned segment. There have been material changes inthe structure of the Bulgarian banking sector over the past 4 years, most notably, the exit of Greek-owned banks. Overall, 2018 wascharacterized by a sizeable credit growth, and strong deposit growth continues to drive lending. Despite improvements, NPLs ofnon-financial corporations remain relatively high for EU standards, but banking sector capital adequacy and profitability aregenerally strong. There was a recent case of bank failure (2014) that required repayment of insured depositors by the BulgarianDeposit Insurance Fund (BDIF), putting a severe strain on its financial capacity. Moreover, the failure of of the bank highlightedcorporate governance problems at domestically-owned banks, and exposed weaknesses in bank supervision and resolution regime.Authorities have taken a set of measures to address weaknesses in regulatory and supervisory framework exposed by the 2014 bankingcrisis, including seeking support from the World Bank to mitigate the consequences of the crisis. As a result, the World Banksupported the BDIF through a results-based loan to rebuild its reserves and strengthen its institutional capacity, while a jointIMF/WB Financial Sector Assessment Program (FSAP) assessed and helped improve the authorities’ crisis response. In mid-2018 theGovernment adopted a comprehensive action plan that includes measures to further strengthen financial sector stability andgovernance of institutions. The Project provides additional insurance to the BDIF at a relatively low cost from a source otherthan taxpayers’ money, with well-defined drawdown triggers related to the BDIF's deposit insurance and bank resolution obligations.Given still nascent efforts to implement a pan-European Deposit Insurance Mechanism, having access to contingent financingincreases financial stability of the banking sector in Bulgaria, making the BDIF less reliant on a public bailout.The proposedProject is fully consistent with the Country Partnership Framework (CPF) for Bulgaria for the period FY17-FY22. The first Pillar ofthe CPF – Strengthening Institutions for Sustainable Growth – includes the Objective of Improved Resilience and Stability of theFinancial Sector. Under this Objective, the CPF recognizes the pivotal role of the World Bank’s support to the BDIF in bolsteringits institutional and financial capacity to ensure deposit insurance and bank resolution obligations are met fully and on time.