BNB warns banks again about excessive lending

Lending activity in Bulgaria remains high, which in the short term is positive for banks' profitability, but in the long term creates a risk to their balance sheets. This is stated in a press release by the Bulgarian National Bank (BNB), which points out that credit growth is currently influenced by "relatively favorable macroeconomic conditions in the domestic environment" as well as by continuing wage growth.

In the short term, credit dynamics have a positive impact on bank profitability. High credit growth rates, sustained over a long period of time, are a factor in increasing the indebtedness of borrowers and accumulating potential credit risk in banks' balance sheets," the BNB emphasizes.

They add that the external environment continues to be marked by high uncertainty and a potential deterioration in conditions will have an effect on supply chains, exports of goods, consumption, and investment activity.

Given the high degree of integration of the Bulgarian economy into international production and trade chains, this would result in a weakening of borrowers' solvency and an increase in non-performing loans," the central bank said.

At its meeting today, the Governing Council of the BNB approved the level of the countercyclical capital buffer, whose main task is to protect the banking system against potential losses from the accumulation of cyclical systemic risk in periods of excessive credit growth – at 2% for the first quarter of 2027. This means that the indicator will remain at the same level for the 14th consecutive quarter since October 1, 2023.

Given the strong credit growth and high uncertainty, maintaining the 2% countercyclical capital buffer requirement in the first quarter of 2027 confirms the capacity of credit institutions to absorb losses in the event of macro-financial shocks and contributes to the resilience of the banking sector under pressure on profitability and capital position," the institution said.

Translated with DeepL.