bdif_annual_report_2013

Bulgarian Deposit Insurance Fund

2013 annual r e p o r t

Bulgarian Deposit Insurance Fund Annual Report for 2013

Š Bulgarian Deposit Insurance Fund Published by the Bulgarian Deposit Insurance Fund, 2014 27 Vladayska Street, 1606 Sofia, Bulgaria Telephone: +359 2 917 2049, +359 2 953 1217, +359 700 144 03 Fax: +359 2 952 1100 www.dif.bg Contact person: Roumyana Markova, Corporate Communications and International Cooperation Department ISSN 1314-8370 Information published in the 2013 Annual Report of the Bulgarian Deposit Insurance Fund may be quoted or reproduced without further permission. Due acknowledgement is requested.

Bulgarian Deposit Insurance Fund Annual Report for 2013

To The Prime Minister of the Republic of Bulgaria The Governor of the Bulgarian National Bank The President of the National Audit Office

Sirs, In compliance with the requirements of the Law on Bank Deposit Guarantee, I have the pleasure to present to your attention herewith the Annual Report of the Bulgarian Deposit Insurance Fund for 2013.

Rossen Nikolov Chairman of the Management Board Bulgarian Deposit Insurance Fund

Bulgarian Deposit Insurance Fund Annual Report for 2013

Bulgarian Deposit Insurance Fund

Management Board: Chairman:

Rossen Nikolov

Vice Chairman:

Nelly Kordovska

Members:

Bisser Manolov Borislav Stratev Svetla Kostova

Chief Accountant:

Svetla Suvandjieva

Head office:

27 Vladayska Street, 1606 Sofia, Bulgaria

Auditor:

PricewaterhouseCoopers Audit OOD 9-11 Maria Louisa Blvd., 1000 Sofia, Bulgaria

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Contents

Mission, Vision, Objectives and Mandate

7

Chairman’s Address

9

Annual Activity Report of the Bulgarian Deposit Insurance Fund Management for 2013

10

BDIF Organisation Chart

11

Overview of European and Global Initiatives for a New Financial Architecture

13

Timely access of depositors to their guaranteed amounts

16

Alternative methods for bank resolution

17

Management of the risks to the deposit guarantee scheme

19

Adequate funding. Safe and transparent asset management

21

Effective communication. Maintaining depositors’ confidence

22

Good corporate practices. Transparent and efficient governance

25

Appendices 1. Major Financial Indicators

28

2. Overview of the Economic Environment

30

3. Deposit Guarantee

33

4. Investment Policy and Asset Management

40

Annual Financial Statements for 2013

46

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Bulgarian Deposit Insurance Fund Annual Report for 2013

List of abbreviations

APS – Automated Payout System BDIF or the Fund – Bulgarian Deposit Insurance Fund BNB – Bulgarian National Bank CEE – Central and Eastern Europe DGS – Deposit guarantee scheme EC – European Commission ECB – European Central Bank Ecofin – EU Ministers for Economic Affairs and Finance EU – European Union GDP – Gross Domestic Product IMF – International Monetary Fund LBDG – Law on Bank Deposit Guarantee MB – Management Board MF – Ministry of Finance MS – Member State NSI – National Statistical Institute SCPIF – Supplementary Compulsory Pension Insurance Funds

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Bulgarian Deposit Insurance Fund Annual Report for 2013

BDIF Mission To protect depositors’ funds in banks, as well as creditors’ interests in bank bankruptcy proceedings, thus contributing to the stability of and confidence in the banking system

Vision Competent and active participant in the financial stability system

Objectives Maintaining depositors’ confidence Maintaining financial stability

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Mandate The Bulgarian Deposit Insurance Fund is a legal entity established by the Law on Bank Deposit Guarantee in 1999.

In accordance with the Law on Bank Deposit Guarantee BDIF repays the guaranteed amount of deposits, determines and collects annual and entry premiums from banks, and invests its assets in government securities, short-term deposits with banks and deposits with the Bulgarian National Bank.

In compliance with the Law on Bank Bankruptcy BDIF protects the interests of creditors and oversees the lawful and appropriate exercise of trustees’ powers in the bankruptcy proceedings of a bank.

Under certain provisions spelled out in the Law on Credit Institutions BDIF may participate in the increase of capital of a credit institution under BNB’s special supervision and in danger of becoming insolvent.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Chairman’s Address Dear Ladies and Gentlemen,

2013 was another year of gradual improvement in world economy. The coordinated efforts for the recovery of financial markets stability as a prerequisite for economic growth continued. Returning confidence based on clear common rules and regulatory mechanisms is a key element for this recovery.

On a European scale a lot was done to set the elements of the so called Banking Union and the deposit guarantee schemes in the EU member states welcomed the renewed discussions on the Directive on Deposit Guarantee Schemes and the progress on the Directive Establishing a Framework for Recovery and Resolution of Credit Institutions and Investment Firms. The two documents are part of a complementary framework which aims to establish clear rules on how to proceed with failing institutions so as to cause minimum market disruption and provide access of depositors to their funds without recourse to state intervention. The principles of funding, common level and scope of coverage offered, terms of repayment and depositor awareness laid down by the Directive on Deposit Guarantee Schemes contribute to the credibility of the DGS and depositor confidence therein which is essential for their effectiveness.

On the other hand, the Financial Stability Board proposed Key Attributes of Effective Resolution Regimes for Financial Institutions and the IMF and the World Bank asked the International Association of Deposit Insurers to include experts — representatives of the DGS to participate in their missions under the Financial Sector Assessment Programme, assessing the schemes in line with the Core Principles for Effective Deposit Insurance Systems published by the Basel Committee on Banking Supervision in cooperation with the International Association and included from the Financial Stability Board in its Compendium of 12 Key Standards for Sound Financial Systems.

Both the international and European approach in the bank crisis management shows awareness of the importance of the interconnectivity between the resolution regime and deposit guarantee for the stability of the banking system and the stronger role of the DGS in this framework.

At national level, despite the less favourable economic conditions, 2013 saw no intervention of the DGS due to the general financial stability of the Bulgarian banking system. Nevertheless, BDIF stands ready both technically and financially to perform its functions laid down by law and to face a possible expansion thereof.

Rossen Nikolov Chairman of the Management Board Bulgarian Deposit Insurance Fund

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Annual Activity Report of the Bulgarian Deposit Insurance Fund Management for 2013 To meet the new requirements resulting from the changes in the overall financial architecture within the EU, triggered by the recent financial crisis, in 2011 BDIF Management Board adopted a Strategy for BDIF Governance for the period 2011–2014, which outlines its key strategic goals, namely: − to continue winning recognition as a key player in the financial stability system; and − to become an institution operating under the highest standards, meeting up-to-date requirements for effective deposit insurance systems in accordance with the Core Principles for Effective Deposit Insurance Systems, issued by the Basel Committee on Banking Supervision and the International Association of Deposit Insurers, as well as the EU directives.

These strategic goals materialized in the following operational strands on which BDIF has focused since the adoption of the Strategy: − Timely access of depositors to their guaranteed amounts − Alternative methods for bank resolution − Management of the risks to the deposit guarantee scheme − Adequate funding. Safe and transparent asset management − Effective communication. Maintaining depositors’ confidence − Good corporate practices. Transparent and efficient governance.

During the three-year period of the adoption of the Strategy BDIF created an administrative unit for risk monitoring and control as part of the implementation of the tasks set therein, approved and updated a number of documents that are part of the internal regulatory framework — strategies, policies and procedures, and continued to work on the establishment of an Integrated Information System which was modified so as to serve best the needs of BDIF. The Automated Payout System for guaranteed deposits was tested and the instructions on the information submitted thereto were prepared. An Investment Committee was established. A new and more user-friendly website was created and a universal national phone number was introduced to better respond to depositors’ need. BDIF representatives were more active in working groups on both domestic and international institutional levels and in international professional organisations.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

BDIF Organisation Chart Management Board BDIF Management Board is the governing body of the institution. Pursuant to the functions and obligations laid down by the LBDG it takes decisions and oversees the lawful and appropriate implementation of the legal framework establishing BDIF activities — the Law on Bank Deposit Guarantee, the Law on Bank Bankruptcy, the Law on Credit Institutions and the Ordinances thereto. The Chairman of the Management Board organizes and manages the daily operations of BDIF and represents BDIF at home and abroad.

BDIF is governed by a five-member Management Board in the following composition: Chairman:

Rossen Nikolov

Vice Chairman:

Nelly Kordovska

Members:

Bisser Manolov Borislav Stratev Svetla Kostova

Departments As of 31 December 2013, BDIF has 19 employees in the following departments:

Treasury is responsible for the trading activities in the process of investing BDIF funds; prepares analysis and statements for the purposes of investment; complies with the requirements for the implementation of BDIF investment strategy.

Bank Bankruptcy and Early Intervention observes the process on determination, collection and analysis of data on the eligible deposits and banks contributions with BDIF; ensures timely repayment of guaranteed amounts; tests the deposit guarantee system; ensures oversight on bank bankruptcy proceedings and the trustees’ appropriate performance therein; works on alternative methods for bank resolution; ensures the implementation of the contingency plan.

Risk Assessment and Analysis is responsible for the overall risk management framework of BDIF, including investment, information technologies, the business continuity plan; testing the deposit guarantee scheme, macro analysis and analysis of member banks.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Corporate Communications and International Cooperation is responsible for maintaining depositor confidence, media relations, communication with national institutions and international financial and professional organisations, as well as with national deposit guarantee schemes, and for the coordination of international BDIF projects.

Legal is responsible for BDIF legal services — prepares internal regulatory documents and acts in relation to amendments to legislation; ensures legal representation, and is responsible for the legal implementation of BDIF functions under the Law on Bank Deposit Guarantee, the Law on Bank Bankruptcy and the Law on Credit Institutions.

Finance and Accounting is responsible for BDIF financial activities and the internal financial control and accounting of the organisation; it prepares and controls the implementation of the administrative expenses budget; and is in charge of the preparation of BDIF annual financial statements.

Human Resources and Administration is responsible for human resources management, general administrative activities, and BDIF Strategy implementation, and participates in committees, working groups, projects, trainings, etc.

BDIF Organisation Chart

Management Board

Chairman of the Management Board

Treasury Department

Bank Bankruptcy and Early Intervention Department

Risk Assessment and Analysis Department

Corporate Communications and International Relations Department

Experts

Legal Department

Finance and Accounting Department

HR and Administration Department

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Bulgarian Deposit Insurance Fund Annual Report for 2013

BDIF in 2013 2013 was the third year of the implementation of BDIF Governance Strategy. BDIF Management Board and experts continued work on approved tasks and objectives taking into account the national environment and global developments.

Overview of European and Global Initiatives for a New Financial Architecture The disruptions in global and in particular in the European financial system have shown that most countries lack a legislative framework and authorities do not have the necessary tools to cope with crisis and manage ailing financial institutions. Hence, the cost of the crisis turned out to be too high and taxpayers paid the price. According to official data the European Commission took more than 400 decisions for approval of state aid to the financial sector between 2008 and 2013. In the 2008–2012 period the total amount of funds used for capital aid came to EUR 519.9 billion (4.6% of EU GDP for 2012). Guarantees and other forms of liquidity support climbed up to peak levels in 2009, reaching EUR 906 billion (7.7% of EU GDP for 2012).

This clearly indicated the need for plain and stringent financial crisis management rules applicable at both national and cross-border level. To respond to these concerns, the European Commission made a number of proposals for amendments to financial markets and bank legislation, including for a Directive of the European Parliament and of the Council Establishing a Framework for Recovery and Resolution of Credit Institutions and Investment Firms and a Directive on Deposit Guarantee Schemes (recast). This comprehensive framework aims at achieving long-term financial stability, curbing public costs in the event of future crisis and greater harmonisation of legislation across member states.

The Commission proposal for a Directive on Deposit Guarantee Schemes was submitted for deliberation to the Council and the European Parliament on 12 July 2010. Its main objective is to better protect depositors. The key elements of this proposal are: − Simplification and harmonisation with regard to the scope of coverage and the arrangements for payout in particular; − Further reduction of the payout deadline for covered deposits from 20 to 7 working days by 2024; − Introduction of ex-ante funding of DGS with a minimum target level of 0.8% of covered deposits to be built up over 10 years; − Better access for depositors to information about the protection of their savings, and for DGS to information about their member institutions; and − Lending between DGSs on a voluntary basis.

It is considered appropriate to allow expansion of DGS functions and their participation in preventive and early intervention measures and measures for resolution of credit institutions and investment firms. The proposal of the Commission was adopted by the European Parliament at first reading (as amended) on 21 March 2012. Discussions on this file were temporarily suspended due to parallel discussions on the proposal for a Directive Establishing a Framework for Recovery and Resolution of

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Credit Institutions and Investment Firms, with a view to the large number of common issues tackled by both proposals. Discussions reopened in the second half of 2013. As a result of the achieved preliminary political agreement at the last trialogue of end–December 2013, the Committee on Economic and Monetary Affairs to the European Parliament sent an official letter to the Council to notify it will support the compromise reached at the second reading in the European Parliament. The final formal vote and entry into force of the Directive on the Deposit Guarantee Schemes are expected in 2014. The provisions of the directive are to be transposed in the national legislation of the member states within 12 months from the entry into force.

The proposal of the European Commission for a common European framework for recovery and resolution of credit institutions and investment firms aims at establishing a stable system that reduces the risk of occurance of financial crises, and if such a crisis occurs — ensures prompt handling of the situation. The draft directive was published by the European Commission on 6 June 2012. The proposal provides for entrusting national authorities with common powers and tools for prevention of bank crisis and crisis management to preserve banks‘ critical functions and minimise taxpayers‘ exposure to loss. The proposal is based on the principles that in case of resolution, shareholders and creditors should bear the losses, but the latter should not be greater than those which they would have incurred in case of insolvency, limiting support measures to the minimum necessary and minimising the use of public funds. The Committee on Economic and Monetary Affairs to the European Parliament adopted its report on the proposal for a directive for recovery and resolution on 20 May 2013.

As of June 2012 the Working Party on Financial Services to the EU Council held a number of meetings and made significant progress on bringing together different member states positions on key issues proposed in the directive — bail-in, exclusions from this instrument, exemption of creditors from bearing losses at the discretion of the national resolution authority, target level of the resolution fund and entry into force of the provisions on the implementation of bail-in. On 26 June 2013 the Ecofin Council agreed a general approach on the directive for bank recovery and resolution. The general approach keeps the toolkit proposed by the Commission and the principle that shareholders and creditors should bear the losses before using public funds. According to the agreement, the financial arrangements (resolution funds) may be used to absorb losses or recapitalise institution under resolution only after the shareholders and creditors have absorbed losses of a minimum of 8% of all liabilities, including own funds. Covered depositors are excluded from bearing losses in resolution.

The deposit guarantee scheme would step in instead for covered deposits up to the amount of net losses that they would have had to bear had the institution been wound up under normal insolvency proceedings in accordance with the ranking of deposits in insolvency hierarchy. Bulgaria did not join the general approach and insisted on higher flexibility of national authorities with a view to the implementation of the bail-in tool and in particular on the removal of restrictions to exclude certain creditors from loss absorption and the use of the financing arrangements instead. The proposal is expected to be approved in 2014.

BDIF actively participated in meetings, discussions and exchange of opinions in Sofia and in the meetings of the Financial Services Working Party in Brussels to contribute to the formulation of Bulgaria’s position on both proposals.

Bulgaria‘s banking system remained stable and was not directly affected by the crisis due to the strict financial discipline and the conservative policy of the BNB. This gives Bulgaria comparative advantage and provides time to work towards a better internal preparedness by learning from the

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Bulgarian Deposit Insurance Fund Annual Report for 2013

negative experience of western European countries, from the analysis and proposals of the international financial institutions and from the already applicable regime for bank resolution in a number of European countries.

Relevance of the amendments to the DGS The introduction of an effective bank resolution regime is essential for the deposit guarantee schemes.

This has been confirmed by the International Association of Deposit Insurers and the Basel Committee on Banking Supervision in the Core Principles for Effective Deposit Insurance Systems and the Methodology for Compliance Assessment thereto. To this end, the Association is involved also in the development by the Financial Stability Board of the Key Attributes of Effective Resolution Regimes for Financial Institutions and the Assessment Methodology.

The deposit guarantee schemes shall take part in funding the resolution to ensure continuity of banks’ critical functions and continuous access of depositors to their guaranteed amounts. Resolution avoids the unavailability of deposits and the urgent need for liquidity to repay the total amount of covered deposits. In this respect it is logical and adequate for the DGS to contribute to funding the resolution process with an amount equal to the net losses it would have to suffer after compensating depositors in normal insolvency proceedings of the respective bank.

As specified by the European Commission in the Explanatory Memorandum to the Directive of the European Parliament and of the Council Establishing a Framework for Recovery and Resolution of Credit Institutions and Investment Firms, there are synergies between deposit guarantee schemes and resolution. Having a crisis management framework will prevent the escalation of problems, reduce the number of bank failures and hence, decrease the likelihood of DGS payouts. Therefore, it is appropriate and justified to use the DGS funds for prevention, early intervention and resolution.

Nevertheless, in those cases account should be taken of the key function of the schemes, namely — payout of covered deposits.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Timely access of depositors to their guaranteed amounts Alternative methods for bank resolution

Management of the risks to the deposit guarantee scheme

Good corporate practices.

Transparent and effective governance

BDIF GOVERNANCE STRATEGY

Effective communication.

Maintaining depositors‘ confidence

Adequate funding. Safe and transparent asset management

BDIF contributes to the financial stability in Bulgaria by ensuring timely access of depositors to their covered deposits with banks with revoked licences.

Regular tests of the system and payout of covered amounts Under Directive 2009/14/EC covered deposits are to be paid out within 20 working days, but according to the texts of the Directive on Deposit Guarantee Schemes (recast) payout deadline is to be reduced gradually to seven working days by 2024. Furthermore, should an event occur, the DGS should have an adequate level of financial and logistical readiness. Therefore, their systems are subject to regular tests.

To this end, over the recent years BDIF has worked on the development of a specialised software — Automated Payout System for guaranteed deposits — to ensure the technical preparedness for processing data required for the calculation of the guaranteed amount of customers‘ deposits with banks. To ensure maximum efficiency and speed of the payout of covered deposits and to guarantee that any participant in the deposit guarantee system will fulfil accurately and promptly its obligations, BDIF shall regularly test the deposit guarantee system.

All important issues related to the legal and technical implementation of the Automated Payout System were discussed with the Association of Banks in Bulgaria during its development. 2012 saw three successful pilot tests of the APS software in BDIF member banks. The aim was to test, on the one hand, the successful processing of data required for the calculation of the covered amounts in the Automated Payout System, and, on the other hand, to check the software and time resources needed by the bank to generate files under the prescribed instructions and deadlines. While testing the APS all system components and business processes were checked and brought into line with the strictest standards guaranteeing their safety — from the physical access to APS working stations and data processing to data transfer safety. For the full completion of the project a network was set up for a two-way exchange of information between BDIF and the banks through the FINNET port of the BNB to exchange files between banks and BDIF in the event of APS testing. The specialised software matches the existing Bulgarian legislative requirements but gives room for its quick and flexible adaptation to future changes in the field of EU deposit insurance.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

To optimise the covered deposit payout process BDIF adopted a procedure on the selection of a servicing bank to execute payments of amounts up to the covered deposit amounts. This procedure regulates the process on the selection of a servicing bank as laid out in the Law on Bank Deposit Guarantee and Ordinance No. 23 of the BNB on the basis of the criteria approved by BDIF Management Board, which banks should fulfil in order to be included on the list of potential servicing banks.

To this end, instructions were prepared on the format of data and information to be exchanged with the servicing bank.

Contingency action plan BDIF bank bankruptcy and early intervention policy was developed and approved by the Management Board in the past year so that BDIF could react adequately in the event of contingency. The contingency action plan, the work on which started with a survey of international experience and good practices, gives an overview of crisis situations, BDIF regulatory framework for their resolution, and provides a description of the persons responsible and their functions.

Under the bank bankruptcy and early intervention policy a comprehensive Manual on Bank Bankruptcy was developed, covering processes on payout of covered amounts to depositors and control over the activities of BDIF appointed trustees in bankrupt banks, together with an action plan. The manual is to be reviewed and updated to reflect the new functions delegated to DGS under the upcoming directives.

Alternative methods for bank resolution Timely access of depositors to their guaranteed amounts

Management of the risks to the deposit guarantee scheme

Adequate funding. Safe and transparent asset management

BDIF GOVERNANCE STRATEGY

Good corporate practices.

Transparent and effective governance

Effective communication.

Maintaining depositors‘ confidence

Being aware of the need for a timely implementation of an effective national regime for recovery and resolution of credit institutions and of the need for a change in deposit insurance legislation, BDIF focused its efforts on several areas: − Studied international experience and legislation and exchanged information along BDIF membership in the International Association of Deposit Insurers and the European Forum of Deposit Insurers; − Performed analysis;

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Bulgarian Deposit Insurance Fund Annual Report for 2013

− Participated actively in discussions and expressed its views on the proposals for a Directive on Deposit Guarantee Schemes and Directive Establishing a Framework for Recovery and Resolution of Credit Institutions and Investment Firms within Financial Services Working Group No 26 at the Council for European Affairs, chaired by the Ministry of Finance; − Prepared a draft law on amendment to the Law on Bank Deposit Guarantee and other related legislation; and − Worked on building administrative capacity for contingency and bank crisis management.

The alternative bank resolution methods are new not only for Bulgaria but for all European countries. The financial crisis has seen a number of European counties with no special bank bankruptcy regime and the relevant authorities had to take quick actions at the peak of the crisis being aware of the heavy judicial procedure in place in the general case of commercial insolvency. Until 2008 neither the common European legislation, nor the national legislation of EU countries provided for measures to tackle problems caused by the failure of systemically important banks. The bank crisis hit most severely the United Kingdom, Germany, Denmark and Portugal and they were the first to implement changes in their national legislations and despite the restrictions of European law related to the protection of shareholders‘ rights, government interventions, etc., introduced a special bank resolution regime and established new funds to finance this resolution. In parallel with the discussions of the EU proposals, a number of countries, such as France, Poland and Romania started work on the development of a bank resolution regime and are at a different stage of its implementation.

BDIF experts‘ research focused on the legislation and practice of these countries and in particular on DGS participation in bank resolution therein.

Legislation in all areas of life should respect the concrete social and economic environment and social relations. Bulgaria is a member of the European Union and should respect the common European legal framework, but the national bank resolution regime will be truly effective only if it takes into account the structure and specificities of the banking system in Bulgaria. Therefore, BDIF experts provide regular analysis of the banking system, used also in the impact assessment on the implementation of the bank resolution regime, the resolution fund and BDIF‘s role in this regime.

In parallel to the discussions and exchange of information on the future bank resolution regime, a legal analysis was made and criteria on the decision-making for BDIF participation in bank recapitalisation under Article 118 of the Law on Credit Institutions were proposed. The analysis aimed at raising important issues such as the impact of the implementation of this measure, the risk of misuse of BDIF funds, the risk of violation of shareholders‘ rights, BDIF participation in the increase in bank capital with a view to the state aid regime, etc. Article 118 of the Law on Credit Institutions was analysed with regard to the future bank resolution regime and the stages and tools provided for in the proposal for a Directive Establishing a Framework for Recovery and Resolution of Credit Institutions and Investment Firms.

The criteria to be considered when taking a decision on the acquisition of bank assets under Article 118, paragraph 1 of the Law on Credit institutions (Article 12, paragraph 1, item 9 of the Law on Bank Deposit Guarantee) were discussed as a short-term and protective measure.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Management of the risks to the deposit guarantee scheme Alternative methods for bank resolution

Adequate funding. Safe and transparent asset management

Effective communication.

Maintaining depositors‘ confidence

BDIF GOVERNANCE STRATEGY

Timely access of depositors to their guaranteed amounts

Good corporate practices.

Transparent and effective governance

Based on the Strategy for BDIF Governance for the period 2011–2014 adopted by the Management Board of BDIF the management of potential risks to the deposit guarantee scheme was highlighted as one of the major directions of BDIF development. Actions initiated to accomplish this goal were as follows: − Establishment of a unit within the BDIF structure working in the area of risk assessment and analysis and the adoption of required internal statutory framework in this field; − Identification of risk areas and assessment of various risks for the institution; and − Definition and introduction of required controls and mechanisms intended to limit risks to an acceptable level for the organisation and subsequent monitoring.

Following the study of international experience, good corporate practices, including standards, issued and adopted by the UK Institute of Risk Management and the experience of other organisations in the field of deposit insurance, in 2011 a Risk Assessment and Analysis Department was established and a package of internal statutory acts providing the major guidelines in this field were adopted: Risk Management Policy and Methodology of Risk Assessment and the related procedures.

Various techniques for identification of trouble zones and various accents in the work on risk assessment in the 2011–2013 period reflected the understanding that risk management is a strongly dynamic system and therefore different forms of analysis should be sought. In parallel, BDIF followed a uniform approach in risk management which is characterised by clearly and transparently defined objectives and responsibilities of all participants. The major tools of risk identification involve analysis of the deposit guarantee scheme, analysis of the organisation as well as simulations of events of paramount importance for the implementation of the mandate and functions of the organisation.

In 2011 BFIF carried out a self assessment based on the Core Principles for Effective Deposit Insurance Systems issued in 2009 by the Basel Committee on Banking Supervision and the International Association of Deposit Insurers, jointly with institutional partners from the financial safety net which helped initially identify major external risks to the deposit guarantee scheme in Bulgaria. The results pointed to a number of activities and areas which need to be addressed and measures for their improvement were defined. In 2013 an external audit of BDIF information systems was carried out which also helped identify a number of risk areas associated with the receipt, storage and use of information in BDIF.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

To this end, in 2012 efforts were focused on reducing external risks to the organisation — completing the design of APS and carrying out APS pilot tests, improving the operational work with the partners from the financial safety net in Bulgaria and initiating steps for concluding an agreement with the Hellenic Deposit and Investment Guarantee Fund. As a result of these measures the 2012 risk exposure report showed significant decrease in the institution‘s overall risk exposure level.

In 2013 the work intended to subdue external risks continued. As a result the APS software was successfully launched, an agreement was reached with the BNB for signing an agreement on information exchange and cooperation and an agreement for cooperation with the Hellenic Deposit and Investment Guarantee Fund was prepared. In addition, emphasis was put on introducing a number of new control mechanisms intended to reduce internal risks, including the adoption of Procedures to the Information Security Management Policy, an analysis of investment and accounting operations, access to information, etc. The structure of the Integrated Information System started in 2011 was further elaborated. It is aimed to guarantee the availability and safety of information and to help organise the work in the institution.

For the purpose of efficient management of the risk of triggering the deposit guarantee scheme, BDIF continued to build and improve the system of risk management (early identification and monitoring of external risks) evolving from the banking sector and the macro environment in 2013. The system of risk management was supplemented by a number of fresh analyses of the banking system and deposit guarantee scheme. Concurrently, tests of possible models for risk-based premium contributions for Bulgarian banks continued in the light of the pending directive on deposit guarantees.

In line with this directive the European Banking Authority will provide methodological notes on the harmonisation of the approach for determination of risk-based premium contributions.

Another 2013 element in the external risks management framework within the Risk Management System was the adequate capitalisation. To this end, BDIF capitalisation was analysed in the context of the macro stress test of Bulgaria‘s banking system. The results show a high capitalization of the institution. The implementation of the B-analyzer analytical software continued aiming to support the work on identification and monitoring of external risks to BDIF evolving from the banking sector and the macro economy.

To provide a business continuity of BDIF in the event of disaster that may cause serious damages to the building, equipment, information systems and BDIF documentation, or in the event of inability to use these resources BDIF developed a business continuity plan in 2012. This plan aims to prepare the organisation for events that may cause a disturbance of the operations and to specify the relevant actions providing the fullest possible restoration of the normal work within a reasonable short time. In 2013 additional steps were initiated for the technical implementation of the BDIF Business Continuity Plan. The major step includes the decision of BORIKA-Bankservice AD to provide services on BDIF remote servers. The BDIF Business Continuity Plan is expected to be launched in 2014.

Although individual external risks remained higher than projected due to factors beyond BDIF control or influence, the environment improved as a whole. A resounding success was reported in managing internal risks in the organisation, which were largely reduced to acceptable values.

Sharing BDIF management‘s understanding that risk identification is a task of primary importance for an institution in prevention of crises and avoidance of operational errors, the entire efforts in this area in recent years resulted in reducing risks to low or acceptable levels for the institution.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Adequate funding. Safe and transparent asset management Management of the risks to the deposit guarantee scheme

Effective communication.

Maintaining depositors‘ confidence

Good corporate practices.

Transparent and effective governance

BDIF GOVERNANCE STRATEGY

Alternative methods for bank resolution

Timely access of depositors to their guaranteed amounts

The major responsibility of BDIF is to safeguard and invest the funds, which are managed in line with the following principles: − safety and protection of the assets; − liquidity maintenance for execution of liabilities; and − minimisation of risks and optimisation of income, taking due account the specific features of the internal financial market.

In accordance with the Law on Bank Deposit Guarantee BDIF funds are to be invested in securities issued or guaranteed by the government: securities issued on the domestic market, bonds issued on external markets (global bonds and Eurobonds), short-term deposits with banks under Article 2, paragraph 5 of the Law on Credit Institutions, and deposits with the BNB. In accordance with the constraints imposed by the Management Board the bulk of funds are invested in deposits with the BNB and the share of government securities in the BDIF portfolio remains under 50% throughout the year. In accordance with a decision of the Management Board, as of 2004 BDIF has not placed funds on deposits and/or repo agreements with banks. For further details on BDIF‘s investment activity in 2013 see Appendix 4.

Under the adopted Strategy for BDIF Governance for the period 2011–2014 the initiated measures were intended to ensure independent investment in line with the objectives and constraints defined by the LBDG and the Management Board. In 2011 an Investment Committee was established including the Chairman of the BDIF Management Board, officers from the Treasury Department and the Risk Assessment and Analysis Department. The Committee developed the BDIF‘s Investment Strategy and the document is reviewed and updated regularly, at the beginning of each quarter. To fully separate functional responsibilities within the investment process the entire back office activity was shifted to the Finance and Accounting Department after the changes made to the organisational structure in 2011.

Under the LBDG in case of shortage of resources BDIF may use loans from the government budget, after a resolution of the National Assembly, from Bulgarian and foreign banks as well as from other entities. To improve the access to alternative financing, in 2013 steps were taken toward a conclusion of framework agreements with Bulgarian banks for providing liquidity in form of repo agreements

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Bulgarian Deposit Insurance Fund Annual Report for 2013

where necessary within the options provided for by the LBDG. Until year-end two of these agreements were finalised and the preparatory work on few other agreements has been completed at a different degree. BDIF will benefit from these agreements, providing additional channels of access to liquidity thus minimising any possible negative effects on the government securities market as a whole, associated with BDIF‘s fast portfolio liquidation where necessary and under the conditions of a market stress.

In accordance with LBDG the target level of BDIF funds to the total amount of member banks‘ eligible deposits is 5%. As at 31 December 2013 BDIF funds amounted to BGN 1,836,457 thousand, which represented 3.27% of the total amount of the banks‘ eligible deposits of BGN 51,581,508 thousand.

The ratio of BDIF‘s resources to covered deposits (BGN 196,000) is 4.66%.

Effective communication.

Maintaining depositors‘ confidence Good corporate practices.

Transparent and effective governance

Timely access of depositors to their guaranteed amounts

Adequate funding. Safe and transparent asset management

BDIF GOVERNANCE STRATEGY

Management of the risks to the deposit guarantee scheme

Alternative methods for bank resolution

Interinstitutional Cooperation In accordance with the objective of achieving effective communication laid down in the Strategy BDIF actively cooperate with national institutions responsible for maintaining financial stability. Fund‘s representatives took part in the Financial Services No. 26 Working Group to the Council on European Issues established by order of the Minister of Finance.

In 2013 BDIF continued to be actively involved in formulating Bulgaria‘s position on the Proposal for a Directive Establishing a Framework for Recovery and Resolution of Credit Institutions and Investment Firms of 2012 and on the Proposal for a Directive on Deposit Guarantee Schemes (recast) by participating in the meetings of the Financial Services Working Party in Brussels between September 2012 and March 2013.

BDIF is working together with the BNB on preparing an agreement between the two institutions which will update the arrangements between them in the Memorandum of 1999.

BDIF together with the Bulgarian National Bank, the Ministry of Finance and the Financial Supervision Commission bears responsibility for maintaining the financial stability in Bulgaria. Each of these institutions is supposed to work within their competences and jointly with the remaining institutions

22

Bulgarian Deposit Insurance Fund Annual Report for 2013

for maintaining the credibility in the financial system, reducing the risk of financial crises and for rapid and effective handling of any emerging problems. Irrespective of the role assigned to deposit guarantee schemes by financial institutions and the proposals on Directives Establishing a Framework for Recovery and Resolution of Credit Institutions and Investment Firms and on Deposit Guarantee Schemes in the system of financial stability, in Bulgaria BDIF still does not formally participate in the Financial Stability Advisory Council and the Standing National Group for Financial Stability thereto.

In 2012 a letter was sent to the members of the Financial Stability Advisory Council with a proposal to include the Chairman of BDIF Management Board in the work of the Standing National Group for Financial Stability. The BDIF proposal may be discussed by the Financial Stability Advisory Council only after legal amendments and changes to the rules of procedure of the Standing National Group for Financial Stability are made.

In October 2013 a Memorandum of Understanding was signed with the University of National and World Economy in Sofia. The Memorandum provides opportunities for internship and professional career of students, participation in research projects, joint organisation of scientific events, preparation of expert opinions, development of common academic programmes, analysis and studies in the areas of deposit guarantee and bank bankruptcy.

By the end of 2013 BDIF participated in the Financial Consumer Protection and Financial Literacy Steering Committee chaired by the Financial Supervision Commission with the participation of the BNB, the Ministry of Finance, the Commission on Consumer Protection, the President‘s Administration, the Ministry of Economy and the Ministry of Education and Science. The major goal set forth by the Steering Committee in 2014 involves development of a national strategy for financial education. The implementation of the strategy is supported by the World Bank through recommendations, practical assistance and the use of experience from other similar projects.

International Activities In accordance with the Strategy BDIF continued its active work in the international community by regularly exchanging information and experience and participating in events of various international organisations.

Within the activity of the International Association of Deposit Insurers BDIF took part in the work of the Executive Council, standing committees, Europe Regional Committee and the fora organised by them, as well as in the information exchange among its members. BDIF experts improved their qualification by participating in technical seminars on investment management, dealing with parties at fault of bank failures and fraud in deposit insurance, contingency planning as well as in the Second Bi-Annual Research Conference Evolution of the deposit insurance framework: designing features and resolution regimes.

The major focus in the work with the Association was the Core Principles for Effective Deposit Insurance Systems issued jointly with the Basel Committee on Banking Supervision in 2009 and the related Methodology for Compliance Assessment of 2010. The review and updating of the Core Principles and the Methodology initiated by the Association were aimed to update the documents and to make them reflect more adequately and more effectively the lessons learned of the recent global financial crisis. The Steering Committee for the Review and Updating of the Core Principles established in February 2013 includes representatives of 23 member organisations. The Chairman of the BDIF Manage-

23

Bulgarian Deposit Insurance Fund Annual Report for 2013

ment Board is a member of the Steering Committee and Fund‘s experts are directly involved in two of the six working groups. The updated version of the Core Principles together with the Methodology will be discussed with major external partners: the Basel Committee on Banking Supervision, the IMF, the World Bank, the European Forum of Deposit Insurers, the Financial Stability Board and the European Commission. By mid-2014 the document will be submitted for approval to the Financial Stability Board.

Concurrently, in reply to the IMF invitation the Association started preparing experts from its member organisations to participate in the assessment of deposit guarantee schemes in various jurisdictions under the Financial Sector Assessment Program. With the inclusion of its experts, who will carry out assessments under the Core Principles, the Association became an IMF partner and a standard evaluator.

The work of the European Forum of Deposit Insurers was focused on the Proposal for a Directive Establishing a Framework for Recovery and Resolution of Credit Institutions and Investment Firms and on the Proposal for a Directive on Deposit Guarantee Schemes (recast). BDIF representatives took part in the meetings of the EFDI EU Committee and its working groups. BDIF experts took part in discussions and meetings in the established working sub-groups to the Forum: stress tests, risk-based contributions, depositor preference, glossary and terms, single customer view and the group on crisis resolution and that of PR. The annual conference of the European Forum held in Rome in September 2013 was devoted to the Roles of DGS, ICS and Crisis Resolution Fund in Granting Consumer Protection and Financial Stability.

In the framework of the information exchange among the members of the European Forum BDIF replied to a number of enquiries throughout the year and presented its experience. To study good practices BDIF conducted a survey among EFDI‘s members on the recapitalisation of distressed banks with DGS funds.

Since its establishment BDIF has exchanged experience and information on a bilateral basis with foreign deposit guarantee schemes. Consistent with its tradition BDIF hosted two working visits in 2013.

In May 2013 the General Director of the Albanian Deposit Insurance Agency discussed with BDIF in Sofia the following topics: the organizational structure of a deposit guarantee scheme, premium contributions, investment policy and payout procedures. At the meetings held in November with the Chairman and experts of the Bank Deposit Guarantee Fund of Romania issues of mutual interest were discussed: the role of the deposit guarantee scheme in maintaining financial stability, resolution framework and DGS role in it, deposit payout and public awareness. In 2013 BDIF experts worked also on preparing an agreement with the Hellenic Deposit and Investment Guarantee Fund.

BDIF met IMF representatives during their visits in Bulgaria in November 2013. In October and November meetings and discussions were held with World Bank representatives within a technical visit for the financial sector.

Maintaining depositors‘ confidence Maintenance of depositors‘ confidence, a top priority of BDIF since its establishment, is also set out in the Strategy. Based on the established approach of balanced and timely information the Fund regularly informed the media and the general public about its functions and activities. The information on

24

Bulgarian Deposit Insurance Fund Annual Report for 2013

the mechanisms of deposit protection and on other individual questions was provided by telephone and e-mail messages, via the BDIF website, and by visiting the Fund‘s office. The bulk of phone enquiries are received through the universal national telephone number launched in 2011. The Register of Depositors‘ Enquiries created in early 2012 is intended to monitor depositors‘ awareness and sentiment in order to satisfy information needs of depositors. BDIF new website launched in December 2011 was supplemented and renewed and in 2013 a new section related to EU issues was added.

In line with the policy of maintaining the awareness of depositors BDIF traditionally provides for distribution free of charge to member banks through their branch network its ‘Questions and Answers about Deposit Insurance’ brochure. In addition the e-version of the brochure in Bulgarian and English is published on banks‘ websites. Positive responses received directly from depositors and through banks proved its utility and the need of further actions intended to enhance awareness. Depositors obtain information about BDIF also from other Fund‘s information materials that are disseminated via the website and on-site.

In line with the BDIF Communication Policy adopted in 2012, the adoption of a Communication Strategy and a Crisis Communication Strategy and a plan to it is forthcoming.

Good corporate practices.

Transparent and effective governance Timely access of depositors to their guaranteed amounts

Alternative methods for bank resolution

Effective communication Maintaining depositors‘ confidence

BDIF GOVERNANCE STRATEGY

Adequate funding. Safe and transparent asset management

Management of the risks to the deposit guarantee scheme

One of the key Fund‘s objectives laid down in the 2011 Strategy is ‘Good corporate practices. Transparent and effective governance’. Priorities determined in accomplishing this objective were as follows: − further development and improvement of the internal regulations; − introduction of clear and transparent procedures for staff recruitment and mobility; − enhancement of professional and personal competences of the staff; − employee performance management; and − establishment of cooperation with international financial institutions for collaboration on programmes for building and strengthening the administrative capacity of counterpart organisations in other countries.

25

Bulgarian Deposit Insurance Fund Annual Report for 2013

Based on the experience gained, the study of other organisations‘ experience, the recommendations of the National Audit Office and the internal audit, BDIF internal regulations were further developed and structured as a uniform system. Since 2011 the following documents have been drafted, adopted and updated: Human Resources Management Policy, Code of Ethical Conduct, Risk Management Policy, Policy on Bank Bankruptcy and Early Interventions, Communication Policy, Information Security Management Policy, Rules of Internal Control over BDIF Activities, etc. To further develop principle guidelines laid down in the above policies specific and detailed rules and procedures for major BDIF activities were drafted.

BDIF management realises that the success of an organisation depends on its staff expertise and commitment. Therefore, its efforts are aimed at recruiting, keeping and developing expert staff.

Low employee turnover and high qualification grades proved the success in this area. In 2013 no employee left the Fund and one new employee was appointed in the Bank Bankruptcy and Early Intervention Department strictly following the staff recruitment procedures. The Human Resources Management Policy is focused primarily on strengthening of professional and personal competences of BDIF staff. Training is planned in accordance with the required qualification for accomplishing strategic goals and the need of improving the personal performance based on assessment results. Due to BDIF‘s specific activity the bulk of staff training goes along the International Association of Deposit Insurers and the European Forum of Deposit Insurers. In 2013 BDIF employees attended a number of training courses and fora organised by the International Association of Deposit Insurers, the European Forum of Deposit Insurers, and in Bulgaria. Three BDIF employees passed successfully exams for acquiring international certificates in financial analysis and financial risk management. The training was financed by BDIF. Given the future extension of BDIF functions laid down in the Proposal for a Directive on Deposit Guarantee Schemes and the Proposal for a Directive Establishing a Framework for Recovery and Resolution of Credit Institutions and Investment Firms, a training of BDIF employees on valuation of financial institutions was carried out in partnership with PricewaterhouseCoopers.

Based on the analysis of the 2012 annual performance assessment, in 2013 efforts were intended to improve the employee performance management: setting out of measurable objectives well synchronised with the BDIF Strategy; assessment of the individual contribution of each employee to the successful implementation of particular projects; specification of assessment criteria regarding the specificity of the work, recruitment requirements and responsibilities in accordance with the job description; automation of the employee performance management by further development of the Integrated Information System. The assemblage of the Integrated Information System will be completed in 2014.

In 2013 BDIF approached the World Bank to investigate the possibilities for cooperation and technical assistance in three major areas: (а) BDIF involvement in activities for capacity building of counterpart organisations in other countries supported by the World Bank or planned to be supported in establishing or modernising deposit guarantee schemes; (b) technical assistance for build on capacity of BDIF; (c) BDIF involvement in national programmes for financial education and financial services consumer protection supported by the World Bank. Following the meetings with the Chairman of the Management Board and BDIF experts within the technical visit in Bulgaria, the representatives of the World Bank declared their intent to work in partnership with BDIF in the three areas, with particular projects pending to be specified.

26

Bulgarian Deposit Insurance Fund Annual Report for 2013

Administrative Expenses Budget for 2014 The accomplishment of strategic and immediate operational objectives is the basis for the Administrative Expenses Budget of BDIF for 2014, approved by Resolution No. 116 of 17 December 2013 of the BNB Governing Council, totalling BGN 1,671,860.

The work done for implementing the Strategy provides reassurance to BDIF‘s management that it will successfully cope with future challenges and tasks.

This Report was approved by the Management Board of the Bulgarian Deposit Insurance Fund on 21 March 2014 and signed on its behalf by:

Rossen Nikolov Chairman of the Management Board Bulgarian Deposit Insurance Fund

27

Bulgarian Deposit Insurance Fund Annual Report for 2013

Appendix 1. Major Financial Indicators Statement of financial position as at 31 December 2013

BGN’000

31 December 2013

31 December 2012

TOTAL ASSETS

1,837,244

1,580,969

– Cash and cash equivalents

1,049,195

848,696

– Available for sale securities

787,262

731,395

752

802

– Intangible and other assets

35

76

TOTAL LIABILITIES

47

49

1,837,197

1,580,920

– Property and equipment

NET ASSETS

Statement of BDIF results from operations for the year ended 31 December 2013

BGN’000

31 December 2013

31 December 2012

Result for the year

262,289

243,351

– Premium contributions

246,312

218,713

19,349

27,231

19,319

27,032

–

3

30

196

(1,916)

(1,134)

(1,920)

(1,141)

Penalty interest for delay

4

7

– General administrative costs

(1,456)

(1,459)

Comprehensive income to be reported in the Income Statement in the future

(6,012)

12,292

– Change in the fair value of available-for-sale financial assets

(6,012)

12,292

(5,962)

12,400

(50)

(108)

256,277

255,643

– Investment income Investment income from government securities Interest income from deposits Net gains/(losses) from sales/maturity of government securities – Other income/(losses), net Net gains/(losses) from revaluation and foreign currency transactions

Other components of net assets

Gains/(losses) occurred from revaluations during the year Less: Reclassification adjustment of (gains)/losses, included in the current year result TOTAL COMPREHENSIVE RESULT FOR THE YEAR

28

Bulgarian Deposit Insurance Fund Annual Report for 2013

Statement of cash flows for the year ended 31 December 2013 on 1 January 2013

on 31 December 2013

848,696

1,049,195

Cash and cash equivalents

on 1 January on 31 December 2012 2012 558,357

848,696

Statement of changes in net assets Balance as at 1 January 2012

1,325,277

Total comprehensive result for the year

255,643

Balance as at 31 December 2012

1,580,920

Total comprehensive result for the year

256,277

Balance as at 31 December 2013

1,837,197

The structure of BDIF’s financial assets and liabilities as at 31 December by category is presented in the table below:

31 December 2013 BGN’000

31 December 2012 BGN’000

1,049,195

848,696

787,262

731,395

1,836,457

1,580,091

10

11

10

11

Financial assets ‘Loans and receivables’ category Cash and cash equivalents ‘Available-for-sale financial assets’ category Available-for-sale government securities

Financial liabilities ‘Other financial liabilities’ category Other liabilities

29

Bulgarian Deposit Insurance Fund Annual Report for 2013

Major financial ratios 31 December 2013

31 December 2012

0.87%

1.56%

BGN’000 15,977

BGN’000 24,638

Ratio of BDIF liquid assets to total assets

71.94%

66.30%

Ratio of BDIF high liquid assets to total assets

64.71%

65.87%

Return on total assets of BDIF Net income earned

The return on total assets was determined as a ratio between the BDIF net income (net of premium contributions) and BDIF total assets at the end of the reporting period.

The net income earned was calculated by deducting premium contributions from the financial result for the year.

The ratio of liquid assets to total assets of BDIF was calculated as a ratio of liquid assets with maturity of up to 1 year to BDIF total assets.

The ratio of high liquid assets to total assets of BDIF was determined as a ratio between cash on current accounts, one-week deposits with the BNB and the market value of bonds in BDIF’s portfolio, issued by the government in foreign markets, to the total assets of BDIF.

Appendix 2. Overview of the Economic Environment The World Economy in 2013 Global economic environment slightly improved in 2013. A gradual stabilisation in peripheral euro area economies and a decline in systemic risks to the global financial system were observed. Over the review year the world economy posted growth of 3%, with individual fast-developing countries and regions still tending to record better economic growth than some industrialised countries. Real GDP in developed economies increased by 1.3%, while emerging markets grew by 4.7%.

The US economy retained its high growth in the context of strengthening consumption and favourable monetary situation. In 2013 real GDP growth was 1.9%, compared to 2.8% in 2012. The sound macroeconomic situation and Federal Reserve System stimulus measures in the form of government bond and financial instrument purchases backed by mortgage bonds led to labour market improvements in the world’s largest economy.

The last year could be qualified as tough but successful for the euro area whose financial sector experienced a number of reforms. Over the second half year euro area economy posted positive growth, thus succeeding to overcome the recession started in early 2012. This growth, however, was insufficient to offset the economic activity contraction in the first half year, and euro area economy still recorded negative growth at -0.5% for 2013. Germany’s economic growth was still stronger than that in most euro area countries. Italy and Spain, the large peripheral economies, remained in recession, while France registered GDP growth for 2013 and managed to overcome the recession. High unemployment and decreased debts of the private secor continued to exert pressure on the growth.

30

Bulgarian Deposit Insurance Fund Annual Report for 2013

At the end of 2013 the unemployment rate in the euro area reached its historical peak of 12.0%. The largest unemployment rates were reported in Spain and Greece, unlike Germany and Luxembourg posting the lowest values.

The positive effect of the Outright Monetary Transactions announced by the ECB in 2012 for providing financial assistance by the European Financial Stability Facility and the European Financial Stabilisation Mechanism continued to be perceived in 2013. The cost of financing in some peripheral countries remained low throughout 2013, thus facilitating budget deficit financing. In addition, to foster the European economy in 2013, the ECB cut its interest rate on main refinancing operations in two steps of 25 basic points each to 0.25%.

In the short run, the weak economic growth in developed countries and relatively high unemployment appear to be the major challenges to the world economy. Expectations show that 2014 will be marked by increasing economic activity. The growth rate in most economies is expected to be close but higher than that in 2013. Major risks to the global economic development stem from a potential growth slowdown in emerging markets.

Bulgaria’s Economy in 2013 Bulgarian economic growth remained positive in 2013, though domestic GDP stayed below its potential. It increased in real terms by 0.9%1 over 2013 whereby its positive rate of change was retained for the fourth consecutive year, though remaining still below the pre-crisis values of 2008. Bulgaria’s macroeconomic policy continued to maintain the economic and fiscal stability over 2013 despite the political and social uncertainty.

Main factors behind the sustained positive growth of the Bulgarian economy in 2013 include the increased exports, reflecting recovering external demand by the EU and global economy, and expanded public expenditure. Concurrently, domestic demand, by contrast to 2012, recorded declines, remaining strongly subdued as a result of internal uncertainty and high unemployment levels. In 2013 gross fixed capital formation in economy remained slightly below the levels reported in the previous year.

The weak economic activity and the political and social uncertainty were among the factors affecting negatively the labour market over the year. NSI data show that in the fourth quarter the unemployment rate rose to 13.0%, from 12.4% in the fourth quarter of 2012. Similar rates were last registered at the end of 2003. The number of employees in the economy remained broadly unchanged over 2013, while that of unemployed persons rose by 5.32% from the same period of 2012.

The increased exports in 2013 affected balance of payments current account which recorded a surplus of EUR 751.3 million (around 1.9% of nominal GDP for 2013). By comparison, in 2012 the current account balance was negative at EUR -333.9 million (approximately -0.8% of nominal GDP for 2012). In 2008, when the highest current account deficit was reported for the last ten years, its value reached EUR 8.182 billion (23.09% of nominal GDP for 2008). The main reason behind the improvement of Bulgaria’s current account was the trade balance improvement due to the larger increase in exports compared to imports of goods. In 2013 trade balance improved significantly, though remaining negative at EUR -2,353.3 million against a negative balance of EUR -3,460.3 billion in 2012.

1

Mid-March 2014 data on Bulgaria‘s economy. Preliminary data on GDP, balance of payments, and gross external debt.

31

Bulgarian Deposit Insurance Fund Annual Report for 2013

Financial account of the balance of payments over the last year was negative at EUR -1,465.6 billion (-3.7% of GDP) against a surplus of 1,466.2 billion for 2012.

Gross external debt of Bulgaria decreased by EUR 441.3 million to EUR 37.338 billion (93.5% of nominal GDP for 2013 compared to 94.6% for 2012). As of end-2013 the share of private gross external debt was 89.1% (EUR 33.276 billion or 83% of nominal GDP for 2013). The weight of public and publicly guaranteed gross external obligations in total debt by end-2013 was 10.9% (EUR 4.062 billion or 10.17% of GDP against 11.5% as of end-2012).

At the end of 2013 prices in the economy measured by HICP2 and CPI3 posted annual declines of -0.86% and -1.59% respectively. Deflation in 2013 was mainly due to the decrease in administratively set electricity prices, with no upward price pressure observed in the Bulgarian economy, driven by the increased energy, food and commodity prices in international markets over the previous years.

The lack of price pressures was consistent with developments observed in the euro area and other large world economies. The weak economic growth and the actual cyclical position of the economy coupled with high unemployment rate suggest absence of essential inflationary processes in the short run. At the same time, the low levels of inflation pose risks to the performance of the budget revenue side, since retention or declines in the price level would reduce indirect tax income, i.e. from VAT and excise duties, and the lack of upward pressures in labour remuneration would reflect on direct tax revenue.

Following the fiscal consolidation of previous years, in 2013 the budget deficit rose to 1.9% of GDP. Consolidated fiscal programme (CFP) balance was negative at BGN 1.448 billion generated by the national budget deficit of BGN 891.6 million and EU funds deficit of BGN 556.8 million. The budget position for 2013 was consistent with the law which requires the CFP deficit not to exceed 2% of GDP. On 31 December 2013 fiscal reserve came to BGN 4.7 billion. At the same time, official foreign currency reserves dropped by EUR 1.127 billion over the year (7.24%) to EUR 14.426 billion. By endDecember foreign currency reserves covered 162.93% of the monetary base, comprising 36.12% of GDP. In 2014 Bulgaria’s economy will be basically focused on preserving macroeconomic and financial stability and pursuing structural policies to boost economic growth. Other basic considerations include: – Economic activity will increase due to the improved situation in Bulgaria’s major trade partners of the euro area and world, though remaining subdued compared to pre-crisis levels; – Domestic demand is expected to recover gradually, while exports and foreign direct investments are anticipated to rise as a result of the revival in Europe; – The projected budget deficit for 2014 is estimated at 1.8% of GDP. Exports will remain extremely important for the recovery and growth in the economy, although the performance of 2014 budget revenue will also depend on domestic demand and consumption revival, the successful implemen2 The Harmonised Index of Consumer Prices is a comparable measure of inflation across EU countries. It is one of the criteria of price stability and Bulgaria‘s readiness to join the euro area. The Harmonized Index of Consumer Prices (HICP), just as the Consumer Price Index (CPI), measures the total relative change of the prices of goods and services. Both indices are calculated using the same basket of goods and services, but differ with respect to the weights used. HICP is calculated through the weights, which reflect the individual and collective consumption of all households (including institutional and foreign households) on the economic territory of the country. The main source of information on HICP weights is national accounts data. HICP in year t is calculated with the weights of year t - 2.

3 The Consumer Price Index is the official measure of inflation in the Republic of Bulgaria. It measures the total relative price change of goods and services used by households for private (non-production) consumption and is calculated by applying the structure of final monetary consumption expenditures of Bulgarian households. The main source of information on expenditures is the household budget survey in Bulgaria. CPI in year t is calculated on the basis of the expenditure structure of year t - 1.

32

Bulgarian Deposit Insurance Fund Annual Report for 2013

tation of planned administrative reforms for achieving fiscal purposes and avoiding deflationary processes; – The fiscal discipline will be sustained and the government debt to GDP ratio will remain at its relatively low levels compared to other EU countries; and – Economic growth acceleration is expected to have a favourable effect on the labour market resulting in a moderate increase in employees and a decrease in the unemployment rate.

Appendix 3. Deposit Guarantee 3.1. Bulgaria’s banking system In 2013 Bulgaria’s banking system remained stable, well capitalised with solid liquid buffers. Tier 1 capital adequacy at the banking system level was 16.01% and total capital adequacy comprised 16.97% against a statutory requirement of 12%. Over the year bank assets rose by 3.87% due to household and corporate deposit growth in the liabilities side of the balance sheet. Balance sheet equity increased to a lesser extent (1.67%) as a result of capitalisation of retained profit from previous years (BGN 185.0 million or 3.20%), increased premium reserves (BGN 109.1 million or 35.14%) and issued capital (BGN 54.3 million or 1.41%), whereas revaluation reserves posted a decline (BGN 147.0 million or 41.36%). Banking audited profit for 2013 accounted for BGN 504.0 million, down 4.02% compared with 2012.

Attracted funds in the banking system continued to rise throughout 2013, albeit at slower rates than in 2012, posting growth of 4.51% or BGN 3.186 billion to reach BGN 73.9 billion. Deposits of individuals and households again posted the highest growth of BGN 3.38 billion (9.42%). After the moderation in April and May, over the second half year their monthly growth rates began to accelerate. Nevertheless, the annual growth rate of household deposits failed to reach the values of 2012. Deposits of corporations and other non-credit institutions increased by BGN 1.55 billion (7.01%), a larger value compared to previous years. Funds attracted from credit institutions decreased by BGN 1.60 billion (14.90%) on end-2012 to BGN 9.13 billion (12.35% of all attracted funds). Subordinated term debt matured in the third quarter of 2013, pushing down its value by BGN 326.2 million (21.51%). At the same time, attracted funds in the form of debt-equity hybrid instruments posted growth of BGN 184.6 million (35.52%).

Lending remained strongly subdued over 2013 mainly due to the weak demand for loans in the economy. The total amount of gross loans and advances (before depreciation) rose by BGN 3.412 billion (5.27%), though the reported growth was broadly due to the increased placements with other credit institutions to the amount of BGN 2.740 billion. Most of them were extended to credit institutions abroad since the growth of this indicator was not accompanied by an increase of attracted funds from credit institutions. Gross loans (excluding those to credit institutions) posted a slight increase of BGN 671 million (1.16%). Gross corporate loans picked up BGN 164.4 million (0.43%), and gross retail exposures — BGN 88.5 million (0.48%), compared to a decline in housing loans by BGN 53.1 million (-0.56%) and growth in consumer loans by BGN 141.6 million (1.58%). Loans to central governments and those extended to non-credit institutions grew by BGN 310.3 million (116.72%) and BGN 107.9 million (10.74%) respectively, with most of this growth generated in December.

33

Bulgarian Deposit Insurance Fund Annual Report for 2013

Exposures past-due over 90 days continued to rise, though more slowly than in 2012. BNB data of end-December 2013 show that the share of net loans past due over 90 days was 10.06% of net banking credit portfolio, compared to 10.57% by end-2012. Bad and restructured loans remained at levels close to those of end-2012 (based on BNB data).

In 2013 investment in securities increased by 9.41% (BGN 897.9 million), occupying 12.20% of total banking assets by the end of the year. On the asset side of the banking system balance sheet, a decrease of 5.93% (BGN 560 million) in cash and cash balances with central banks was observed over the year under review. Nonetheless, the increased share of securities and other liquid assets in bank balance sheets boosted the liquid assets ratio under BNB Ordinance No 11 to 27.05% by end-2013 (25.96% by end-2012), pointing to a high liquidity capacity.

Major risks to the banking system in 2014 are related with the ability of credit institutions to generate good earnings in the context of weak economic growth and high unemployment which will affect the quality of extended loans and demand for new loans in the economy. The maintained high levels of liquidity indicators and the strong capital position of the banking system have ensured the stability of this sector in Bulgaria.

3.2. BDIF Member Banks* Allianz Bank Bulgaria Bulgarian Development Bank Bulgarian-American Credit Bank Central Cooperative Bank CIBANK Corporate Commercial Bank Crédit Agricole Bulgaria D Commerce Bank DSK Bank First Investment Bank International Asset Bank Investbank Municipal Bank Piraeus Bank Bulgaria Post Bank (Eurobank Bulgaria) ProCredit Bank (Bulgaria) Raiffeisenbank (Bulgaria) Societe Generale Expressbank TBI Bank

34

Bulgarian Deposit Insurance Fund Annual Report for 2013

T. Ç. Ziraat Bank — Sofia Branch Teximbank Tokuda Bank UniCredit Bulbank Unionbank United Bulgarian Bank

The credit institutions listed below are branches of banks from EU Member States and they do not participate in the Bulgarian deposit guarantee scheme since they are protected by the applicable home country scheme:

Alpha Bank — Bulgaria Branch BNP Paribas S.A. — Sofia Branch Citibank Europe Plc. — Bulgaria Branch ING Bank N.V. — Sofia Branch Işbank AG — Sofia Branch

*As of 1 January 2014

3.3. Information on Deposit Guarantee The deposit guarantee scheme covers depositors’ funds with a bank with revoked license up to the statutory amount of BGN 196,000, per depositor per bank. Deposits of natural persons and legal entities in both national and foreign currency are covered by the guarantee. Deposits of banks and non-bank financial institutions, except for supplementary compulsory pension insurance funds, of the government and government institutions, of municipalities, preferential deposits, deposits of members of the managing bodies of banks and persons related thereto, as well as deposits associated with ‘money laundering’ are excluded from BDIF coverage. Disbursement starts not later than 20 business days from the date of BNB revocation of a bank’s license. Foreign currency deposits are repaid at their BGN equivalent at the BNB exchange rate for the initial day of payment. Payout is made via a servicing bank designated by the BDIF Management Board.

The total amount of eligible deposits was BGN 56,054,591 thousand as of 31 December 2013 (31 December 2012: BGN 51,581,508 thousand). The total number of deposits was 9,520,410 (31 December 2012: 10,166,310). The average deposit amount was BGN 5,888 in 2013 and BGN 5,074 in 2012.

In 2013 the total amount of deposits increased by 8.67%, and their number decreased by 6.35% compared to the previous year. The average deposit amount rose by 16.04% or BGN 814 compared with 2012.

A persistent trend toward a decrease in the number and an increase in the amount of deposits was observed between 2010 and 2013. The number of deposits, after its dramatic fall in 2010, continued to decline, albeit at a more moderate pace. Over the same period, the deposit amount grew at a constant sound rate of 37 per cent and the average amount of a deposit rose from BGN 3.6 thousand to BGN 5.8 thousand.

35

Bulgarian Deposit Insurance Fund Annual Report for 2013

60,000

56,055 51,582

50,000 40,000 30,000 20,000 10,166 9,520

10,000

5,074 5,888

0 Amount of deposits (BGN million)

Number of deposits (thousand) 2012

Average deposit amount (BGN)

Source: BDIF

2013

Breakdown of deposits by currency Lev-denominated deposits amounted to BGN 31,273,754 thousand (55.79%) held by 7,735,177 depositors (81.25%).

Deposits in euro accounted for BGN 20,601,436 thousand (36.75%) held by 1,317,455 depositors (13.84%).

The amount of deposits in other foreign currencies was BGN 4,179,401 thousand (7.46%), their number reaching 467,778 (4.91%).

In 2013 euro-denominated deposits posted the highest relative growth at 9.52%, followed by lev deposits at 9.10% and those denominated in other foreign currencies at 1.80%.

As regards the number, deposits in the three currency groups posted negative growth, with foreign currency deposits recording the most significant decline (-9.42%), followed by lev deposits (-6.35%) and euro deposits (-5.25%).

In the 2010 to 2013 period, no significant changes occurred in depositor preferences concerning the currencies in which their funds were held. The trend to a gradual withdrawal from other currencies and stable interest in lev and euro deposits continued over the review period.

Currency Deposit Breakdown, 2013

Currency Deposit Breakdown, 2012

7.46%

7.96%

36.75%

55.79%

BGN

EUR

Other currencies

36.47%

55.57%

BGN

EUR

Other currencies

Source: BDIF

36

Bulgarian Deposit Insurance Fund Annual Report for 2013

Breakdown of deposits by source The amount of non-financial corporations deposits was BGN 15,953,987 thousand (28.46%) and their number came to 441,070 (4.63%). In 2013 these deposits posted growth in amount (6.99%) and in number (5.12%) compared to 2012.

Household deposits accounted for BGN 39,031,672 thousand (69.63%), their number reaching 9,079,257 (95.37%). In 2013 they posted growth in amount (9.13%) and a decline in number (-6.85%).

Deposits of supplementary compulsory pension insurance funds4 amounted to BGN 1,068,932 thousand (1.91%) and numbered 83 (0.0009%). In 2013 they also posted growth in amount (18.34%) and a decline in number (-28.45%) on 2012.

Following the fall in the number of non-financial corporations deposits in 2011, a gradual increase was reported (6.5% for the 2011 to 2013 period), while deposits of individuals retained the recent years’ persistent trend to a decrease in their number. For the last three years, the number of such deposits dropped by 16%. At the same time, their average amount slightly increased from BGN 2 thousand to BGN 4 thousand.

Breakdown of Deposits

by Source, 2013

Breakdown of Deposits

by Source, 2012 1.8%

1.9%

28.9%

28.5% 69.3%

69.6%

Non-financial corporations Households SCPIF

Non-financial corporations Households SCPIF

Source: BDIF

Breakdown of deposits of up to and above the level of the guarantee Deposits of up to BGN 196,000, i.e. backed by a full guarantee, totalled BGN 34,208,161 thousand (61.03%) and numbered 9,494,080 (99.72%). The average amount of a deposit within this group was BGN 3,603.

Over 2013 the increase in the amount of full guarantee deposits was 8.18% on 2012 against negative growth in their number (-6.41%). Non-financial corporations deposits (8.99%) posted the largest relative growth in the amount of deposits within this group, followed by household deposits (8.11%).

The average amount of this group’s deposits in 2013 picked up BGN 486, or 15.59% on 2012.

The average amount of household deposits of up to BGN 196,000 was BGN 3,456, up BGN 479 on 2012, that of non-financial corporations deposits came to BGN 6,685, up BGN 248 on 2012 and that of SCPIF deposits reached BGN 45.8 thousand (down BGN 14,200 on 2012).

4

According to the changes in the Law on Bank Deposit Guarantee of 18 November 2008, deposits of these funds are guaranteed by BDIF.

37

Bulgarian Deposit Insurance Fund Annual Report for 2013

Full Guarantee Deposits: Breakdown and Dynamics, number in thousand, amount in BGN million EG<BBB DJ<KIG

EB<BBB

EC<EDG

DG<BBB DB<BBB EC=CD=DBCD

CG<BBB

G<BBB

EC=CD=DBCE

K<IEE K<BHE

CB<BBB D<HFG D<JJE FCC FEC

B B

B C

B

?

Source: BDIF

Deposits exceeding the guaranteed amount of BGN 196,000 came to BGN 21,846,430 thousand (38.97%), their number reaching 26,330 (0.28%). The average amount of a deposit within this group was BGN 829,716.

Over 2013 the amount of deposits of over 196,000 rose by 9.45% and their number changed by 19.12%.

Household deposits recorded growth in both the overall amount (13.46%) and number (23.38%).

Deposits of non-financial corporations increased by 18.39% in amount and 13.22% in number. SCPIF deposits posted relative growth of 13.22% in amount and a relative decline of 30.10% in number.

The average amount of a deposit in this group decreased by 8.12% or BGN 73 thousand in absolute value in 2013. The average amount of deposits exceeding BGN 196,000 by source was: household deposits at BGN 469,974 (down BGN 41,000 on 2012), non-financial corporations deposits at BGN 1,325,963 (down BGN 83,000 on 2012), and SCPIF deposits at BGN 14,840 thousand (up BGN 6,078 thousand on 2012).

38

Bulgarian Deposit Insurance Fund Annual Report for 2013

Deposits Exceeding BGN 196,000, Breakdown and Dynamics number in thousand, amount in BGN million #& """

#% "(#

#$ $'' #$ """ #" """

( ("(

) """

' (*$ #$ %# $"#$

' """

#$ %# $"#%

& """ $ """

*"$ #"

*

#'

#%

"

# "')

"

"

Source: BDIF

Guaranteed amount of deposits of up to the coverage level As of 31 December 2013 the guaranteed amount of deposits up to the coverage level was BGN 39,368,841 thousand against BGN 35,952,707 thousand as of 31 December 2012 (up 9.50%).

By 31 December the guarantee coverage ratio, i.e. the ratio between the covered and the eligible deposits, was 70.23% compared to 69.70% for 2012.

DGB<BBB IGN DBB<BBB

IBN HGN

CGB<BBB HBN CBB<BBB

GGN GBN

GB<BBB

K>DBCD

CD>DBCD

H>DBCD

E>DBCD

K>DBCC

CD>DBCC

H>DBCC

E>DBCC

K>DBCB

CD>DBCB

H>DBCB

E>DBCB

CD>DBBK

K>DBBK

H>DBBK

E>DBBK

K>DBBJ

CD>DBBJ

H>DBBJ

E>DBBJ

K>DBBI

CD>DBBI

H>DBBI

B

E>DBBI

FGN FBN

Source: BDIF

Entry and annual premium contributions of banks for 2013 In 2013 annual premium contributions of banks were BGN 246,312 thousand against BGN 218,713 thousand for 2012. As far as the number of member banks in the deposit guarantee scheme re-

39

Bulgarian Deposit Insurance Fund Annual Report for 2013

mained unchanged in 2013 at 26, growth in the total amount of premium contributions was due to the increased amount of the 2012 eligible deposits used for calculating the premium contribution for 2013 (BGN 49,262 million) compared to the eligible deposits for 2011 (BGN 43,739 million) whereon the premium contribution for 2012 was set.

In 2013 there were no newly established banks in Bulgaria to be included in the deposit guarantee scheme; hence, no additional entry contributions were made.

Appendix 4. Investment Policy and Asset Management In accordance with the LBDG, BDIF funds are invested in securities issued or guaranteed by the State: securities issued in the domestic market; bonds issued in external markets (global and Eurobonds); short-term deposits with banks under Article 2, paragraph 5 of the Law on Credit Institutions, and deposits with the BNB.

Investment Portfolio BDIF investment portfolio as of 31 December 2013 amounted to BGN 1,836,457 thousand compared to BGN 1,580,091 thousand at the end of 2012. It posted growth of BGN 256,366 thousand in 2013.

BDIF Investment Portfolio mln. BGN 2,000 1,800 1,778.31

1,600

1,827.13

1,831.51

1,836.46

1,400 1,200

1,047.50

1,000 800

675.37

660.21

600

442.72

703.10

787.26 660.21

683.38

660.21 487.92

463.82

400 200 1.70

0 Q1'2013 Bonds

Q2'2013 Deposits with the BNB

Q3'2013 Account with the BNB

Q4'2013 Portfolio

Source: BDIF

40

Bulgarian Deposit Insurance Fund Annual Report for 2013

Financial Instruments In 2013 BDIF assets were invested in bonds issued by the Bulgarian government and in deposits with the BNB; no deposits were placed with banks. At the end of 2013 BDIF funds comprised around 19 per cent of the total nominal value of marketable Bulgarian government securities in the domestic and foreign markets, with the increase in BDIF portfolio posing a significant challenge in managing these funds on the background of a limited set of eligible instruments. Overall, BDIF pursued a conservative strategy, while maintaining a relatively balanced portfolio structure in terms of instruments with a slight excess of deposits over government bond investments in line with the Management Board decision that the latter may not exceed 50% of the portfolio. By end-March the share of bonds decreased to 37.98%, from 46.29% by end-2012. Throughout most of the year this indicator remained comparatively stable at a level slightly above 37%, rising somewhat to 42.87% over the last quarter. These developments reflect the significant volume of maturing government securities in early 2013, as well as premium contributions of banks paid at the end of March. In addition, gradual BDIF portfolio rebalancing takes longer due to the lack of a sufficiently deep and liquid government bond market in Bulgaria. For the same reasons, the share of deposits and current accounts with the BNB increased from 53.71% at the end of 2012 to 62.03% at the end of the first quarter of 2013.

Portfolio Instrument Breakdown 70% 60%

57.04%

50% 42.87%

40% 30%

37.98%

37.13%

24.90%

38.48% 36.13%

37.31%

36.05%

26.64%

25.39%

20% 10% 0.09%

0% Q1'2013 Bonds

Q2'2013 Deposits with the BNB

Q3'2013

Q4'2013

Account with the BNB

Source: BDIF

41

Bulgarian Deposit Insurance Fund Annual Report for 2013

Investment Portfolio Profitability In 2013 the average weighted yield to maturity of the bonds in BDIF portfolio continued to decline to 2.98% by end year compared to 4.00% at the end of 2012. The main reason behind this dynamics was the BDIF portfolio reinvestment amid current low yields in the Bulgarian government bond market. Concentration of funds in the short- and medium-term maturity segments to ensure better portfolio liquidity also exerted pressure on the attained yield. Remuneration of deposits with the BNB followed the reference quotations of the Bank for International Settlements, Basel, resulting in a 0% interest throughout the whole year.

Portfolio Profitability 4% 3.35%

3.26%

3.21% 2.98%

3%

2%

1.69%

1.68%

1.63% 1.28%

0.00%

0.00%

0.00%

0.00%

1%

Q1'2013

Q2'2013

Q3'2013

Q4'2013

0%

Bonds

Account with the BNB

Portfolio

Source: BDIF

Currency Breakdown of Investment Portfolio In 2013 the major portion of Fund investment was denominated in Bulgarian levs. Lev instruments occupied the highest share in the portfolio at the end of the first quarter after the payment of annual premium contributions by banks: 65.03% against 61.41% by end-2012. The currency structure remained relatively constant over the year, with the lev exposure representing 61.51% of the total portfolio and the euro exposure comprising 36.38%. The share of USD-denominated assets occupying 2.21% by end-2012 continued to increase and reached levels around 2.5% by mid-2013 before falling further to 2.45% at the end of December 2013.

42

Bulgarian Deposit Insurance Fund Annual Report for 2013

Portfolio Currency Breakdown 80% 70%

65.03%

65.00%

63.56%

61.51%

60% 50% 40%

32.62%

36.03%

33.93%

32.43%

30% 20% 10%

2.57%

2.35%

2.51%

2.45%

0% Q1'2013

Q2'2013 BGN

Q3'2013 EUR

Q4'2013 USD

Source: BDIF

Interest Breakdown of Bond Portfolio In 2013 the Ministry of Finance resumed its practice to issue discount securities with maturity of up to 12 months. As a result, the interest structure of BDIF bond portfolio underwent some changes compared to 2012. Fixed coupon securities dominated the bond portfolio, occupying approximately 91%. BDIF invested funds in the two 2013 discount issues, their share comprising 10% of all portfolio securities in the first half of the year. By end-2013 they dropped to 5.22% of all securities held. The limited supply of floating coupon government bonds and lack of new issues with such coupons kept their share broadly unchanged in BDIF portfolio: 9.30% at the end of 2012 against 8.73% at the end of 2013. Partially matured floating coupon securities in circulation were another reason for this dynamics. Relative to the investment portfolio as of end-2013, fixed yield securities occupied 36.88%, discount ones 2.24% and those with floating yields 3.74%.

43

Bulgarian Deposit Insurance Fund Annual Report for 2013

Bond Portfolio Breakdown 100% 86.05%

83.92%

80.87%

80.67%

80%

60%

8.73%

5.22%

10.08%

6.00%

9.51%

9.62%

9.32%

20%

10.00%

40%

0% Q1'2013 Fixed Interest Rate Securities

Q2'2013 Discount Securities

Q3'2013

Q4'2013

Floating Interest Rate Securities

Source: BDIF

Maturity Breakdown and Modified Duration of Investment Portfolio BDIF maintained a low modified duration of below 1 over 2013. This indicator was comparatively stable throughout the year, falling in the second and third quarters to reach again 0.64 by end-December. This dynamics reflects the decreased relative share of government securities in BDIF portfolio and their limited residual term along with the purchases of bonds with relatively lower modified duration.

The main portion of the BDIF portfolio comprised deposits and securities with a maturity of up to three years. Over the year the maturity structure was dominated by instruments of up to one year. In the first nine months of the year they comprised between 75% and 80% of total portfolio, reaching 71.97% by end-2013. They included both securities with a residual term of up to 12 months and funds on deposits and accounts with the BNB. The share of bonds within the maturity segment from three to five years increased during the whole year, reaching 13.32% of the portfolio by end-December. In the first nine months bonds with a maturity of over five years maintained a relatively constant share of around 5% of the BDIF portfolio. At the end of 2013 they passed into the shorter maturity segment, and there were no securities of over five years in BDIF portfolio.

44

Bulgarian Deposit Insurance Fund Annual Report for 2013

71.97%

80%

79.18%

90%

75.02%

100%

77.63%

Portfolio Maturity Breakdown

70% 60%

0.00%

0.00%

0.00%

0.00%

5.04%

0.00%

4.93%

4.88%

13.32%

6.19%

4.91%

10%

4.34%

20%

14.71%

30%

11.14%

15.76%

40%

10.97%

50%

0% Up to 1 year

1 to 3 years

Q1'2013

3 to 5 years

Q2'2013

5 to 10 years Over 10 years

Q3'2013

Source: BDIF

Q4'2013

Portfolio Modified Duration 1.80 1.60

1.47

1.67

1.40

1.48

1.55

1.20 1.00 0.80 0.60

0.64

0.40

0.64 0.58

0.59

Q2'2013

Q3'2013

0.20 0.00 Q1'2013

Bond Portfolio

Total Portfolio

Q4'2013

Source: BDIF

Financial Results BDIF investment income for 2013 was BGN 19,349 thousand compared to BGN 27,231 thousand for 2012. The net change in the fair value of available-for-sale financial assets for 2013 was BGN (6,012) thousand compared to BGN 12,292 thousand for 2012.

45

Financial Statements

2013

Bulgarian Deposit Insurance Fund Annual Report for 2013

Contents Independent Auditorâ&#x20AC;&#x2122;s Report

48

Statement of Operations

50

Statement of Financial Position

51

Statement of Cash Flows

52

Statement of Changes in Net Assets

53

Notes to the Annual Financial Statements 1. General Information

54

2. Summary of the Significant Accounting Policies of BDIF

55

3. Premium Contributions

67

4. Investment Income

67

5. Other Income and Losses, Net

67

6. General Administrative Costs

68

7. Cash and Cash Equivalents

69

8. Available-for-Sale Securities

70

9. Property and Equipment

72

10. Intangible and Other Assets

73

11. Other Liabilities

74

12. Financial Risk Management

74

13. Relations and Transactions with Government Institutions, Authorities and Enterprises

83

47

Bulgarian Deposit Insurance Fund Annual Report for 2013

STATEMENT OF OPERATIONS for the year ended 31 December 2013

Notes

2013 BGNâ&#x20AC;&#x2DC;000

2012 BGNâ&#x20AC;&#x2DC;000

Premium contributions income

3

246,312

218,713

Investment income

4

19,349

27,231

Other income/losses, net

5

(1,916)

(1,134)

General administrative expenses

6

(1,456)

(1,459)

262,289

243,351

(6,012)

12,292

(6,012)

12,292

256,277

255,643

Result for the year Other components of net assets Comprehensive income that will be recognized in the income statement in the future Net change in fair value of available-for-sale financial assets TOTAL COMPREHENSIVE RESULT FOR THE YEAR

4

The accompanying notes on pages 54 to 83 form an integral part of these financial statements

50

Bulgarian Deposit Insurance Fund Annual Report for 2013

STATEMENT OF FINANCIAL POSITION as at 31 December 2013

Notes

2013 BGN‘000

2012 BGN‘000

Cash and cash equivalents

7

1,049,195

848,696

Available-for-sale securities

8

787,262

731,395

Property and equipment

9

752

802

10

35

76

1,837,244

1,580,969

47

49

47

49

1,837,197

1,580,920

ASSETS

Intangible and other assets TOTAL ASSETS LIABILITIES Other liabilities TOTAL LIABILITIES NET ASSETS

11

The accompanying notes on pages 54 to 83 form an integral part of these financial statements

51

Bulgarian Deposit Insurance Fund Annual Report for 2013

STATEMENT OF CASH FLOWS for the year ended 31 December 2013 Notes

2013 BGN‘000

2012 BGN‘000

246,313

219,079

Cash paid to employees and for social security

(879)

(844)

Taxes paid

(102)

(93)

Other proceeds/(payments) from operating activities, net

(358)

(442)

244,974

217,700

2

2

Proceeds related to available-for-sale securities

315,253

250,462

Payments related to available-for-sale securities

(359,604)

(177,761)

Purchases of equipment and other assets

(26)

(59)

Net cash flows used in investing activities

(44,375)

72,644

Payments of finance lease liabilities

–

–

Net cash flows from/(used in) investing activities

–

–

200,599

290,344

848,696

558,357

(100)

15

1,049,195

848,716

Cash flows from operating activities Cash receipts from banks as premium contributions

Net cash flows from operating activities Cash flows from investing activities Proceeds from interest on term deposits with banks

Cash flows from financing activities

Increase in cash flows during the year Cash and cash equivalents at 1 January

7

Foreign exchange gains/(losses) Cash and cash equivalents at 31 December

7

The accompanying notes on pages 54 to 83 form an integral part of these financial statements

52

Bulgarian Deposit Insurance Fund Annual Report for 2013

STATEMENT OF CHANGES IN NET ASSETS for the year ended 31 December 2013

Accumulated result

BGN’000

Revaluation reserve: available-forsale securities BGN’000

BGN’000

Balance as at 1 January 2012

442,622

882,655

1,325,277

Result for the year

243,351

–

243,351

–

12,292

12,292

Total Comprehensive Result

243,351

12,292

255,643

Balance as at 31 December 2012

685,973

894,947

1,580,920

Result for the year

262,289

–

262,289

–

(6,012)

(6,012)

Total Comprehensive Result

262,289

(6,012)

256,277

Balance as at 31 December 2013

948,262

888,935

1,837,197

Net change in fair value of available-for-sale financial assets

Net change in fair value of available-for-sale financial assets

Net assets

The accompanying notes on pages 54 to 83 form an integral part of these financial statements

53

Bulgarian Deposit Insurance Fund Annual Report for 2013

NOTES TO THE ANNUAL FINANCIAL STATEMENTS 2013

1. GENERAL INFORMATION Information on BDIF The Bulgarian Deposit Insurance Fund was established under the Law on Bank Deposit Guarantee in 1999. BDIF was established to protect depositors‘ savings with banks, participating in the scheme, and to repay the insured deposit amounts in case of bank license revocation. According to the Law on Bank Deposit Guarantee, BDIF’s core activity involves determining and collecting annual and entry contributions from banks licensed by the Bulgarian National Bank, investing accumulated funds and paying out guaranteed deposit amounts in case of bank license revocation. BDIF disburses up to BGN 196 thousand of deposits to individuals and legal entities. Along with these functions, BDIF also performs the functions set out in the Law on Bank Bankruptcy. In accordance with the Law on Credit Institutions, the BNB may order а bank subject to special supervision to increase its capital, provided that the new shares will be acquired by BDIF. In such a case, the Management Board of BDIF shall take a decision for the acquisition of a bank’s shares as well as for their transfer.

BDIF address and headquarters: 27 Vladayska Street, 1606 Sofia, Bulgaria.

The personnel as at 31 December 2013 comprised 19 employees (31 December 2012: 19).

Regulatory framework of BDIF operations BDIF operations are regulated by the Law on Bank Deposit Guarantee. This Law requires that cash accumulated from banks shall be invested solely into securities issued or guaranteed by the government, or into deposits with the BNB and short-term deposits with banks.

BDIF is governed by a Management Board consisting of five members designated as follows: - the Chairman of the Management Board — by the Council of Ministers of the Republic of Bulgaria; - the Vice Chairman of the Management Board — by the BNB Governing Council; - one member — by the Association of Banks in Bulgaria; and - two members — jointly by the Chairman and the Vice Chairman of the Management Board of BDIF. The Chairman of the Management Board organizes and manages the daily operations of BDIF and the administrative personnel and represents BDIF at home and abroad.

The term of office of the Management Board of BDIF is four years. As at 31 December 2013 the members of the Management Board of BDIF were as follows: - Rossen Nikolov — Chairman of the Management Board of the Bulgarian Deposit Insurance Fund, assigned by Resolution No. 153 of the Council of Ministers dated 17 March 2011; - Nelly Kordovska — Vice Chairman of the MB of the BDIF, assigned by Resolution No. 1 of the BNB Governing Council dated 13 January 2011;

54

Bulgarian Deposit Insurance Fund Annual Report for 2013

- Bisser Manolov — member, assigned by Resolution dated 23 March 2011 of the MB of the Association of Banks in Bulgaria; - Borislav Stratev — member, assigned by Resolution No. 92-0005 of the Chairman and the Vice Chairman of the MB of BDIF dated 24 March 2011; and - Svetla Kostova — member, assigned by Resolution No. 92-0005 of the Chairman and the Vice Chairman of the MB of BDIF dated 24 March 2011.

2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF BDIF Accounting policies The financial statements were drawn up following the accounting policies listed below. The adopted accounting policies are consistent with those applied in the previous reporting period, unless noted otherwise.

Basis for the preparation of the financial statements The financial statements of the Bulgarian Deposit Insurance Fund have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The financial statements have been prepared on a historical cost basis, modified to include derivative financial instruments and financial assets and liabilities, reported at fair value through profit or loss.

The financial statements are presented in Bulgarian levs (BGN) and all items are rounded to the nearest thousand (BGN’000), unless specified otherwise.

The preparation of financial statements in compliance with IFRS requires the use of estimates and assumptions. Hence, the management has to make its own assumptions on BDIF accounting policy.

A separate disclosure is required for items in the financial statements presuming a higher level of subjective assessment and complexity or where the assumptions and accounting estimates have a material effect on the financial statements.

2.1. New and amended standards and interpretations to the reporting periods ending on 31 December 2013. (а) New and amended standards approved by BDIF. There are no new and amended accounting standards approved by BDIF to be applied for the financial year starting on 1 January 2013. (b) New and amended standards and IFRS improvements mandatorily applied for the first time for the financial year starting on or after 1 January 2013, but currently not applicable to BDIF (although they may affect the reporting of transactions and events in the future).

‘Disclosures — Offsetting Financial Assets and Financial Liabilities’ — Amendments to IFRS 7 (issued in December 2011 and effective for the annual periods beginning on or after 1 January 2013). The amendment requires offsetting disclosures to allow users of the entity’s financial statements to assess better the effect or potential effect of netting arrangements, including rights of set-off.

The said changes did not result in additional or changed disclosures and had no material impact on the assessment or the recognition of transactions and balances herein.

55

Bulgarian Deposit Insurance Fund Annual Report for 2013

(c) New standards and interpretations effective for annual periods beginning on or after 1 January 2013 or later which have not been adopted by BDIF prior this date.

Amendments to IAS 1 ‘Presentation of Financial Statements’ (issued in June 2011, effective for annual periods beginning on or after 1 July 2012) change the disclosure of items presented in other comprehensive income (OCI) in the statement of comprehensive income. The amendment requires entities to separate items presented in OCI into two groups, based on whether or not they may be reclassified (recycled) to profit or loss in the future. The proposed title used by IAS 1 has changed to ‘statement of profit or loss and other comprehensive income’.

The amended IAS 19 ‘Employee Benefits’ (issued in June 2011 and effective for annual periods commencing on or after 1 January 2013) requires significant changes in the presentation and measurement of certain pension income and termination benefits, as well as in the disclosures of all employee benefits. According to the standard, where changes in the net defined benefit liability (asset) occur, they shall be recognised as follows: (а) past-service cost and net interest cost recognised in profit or loss; and (b) remeasurements in other comprehensive income.

‘Offsetting of Financial Assets and Financial Liabilities’ — Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added guidance on the application of IAS 32 to address the inconsistencies identified with certain offsetting requirements. This includes clarification of the meaning of ‘currently has a legally enforceable right to offset’ and states clearly that gross settlement mechanisms are effectively equivalent to net settlement.

‘Disclosures — Offsetting of Financial Assets and Financial Liabilities’ — Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 July 2013). The amendment requires offsetting disclosures to allow users of the entity’s financial statements to assess better the effect or potential effect of netting arrangements, including rights of set-off. The amendment addresses disclosures, but will not affect measurement and recognition of financial instruments.

Improvements in the International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning on or after 1 January 2013).

IFRS 13 ‘Fair Value Measurement’ (issued in May 2011 and effective for annual periods commencing on or after 1 January 2013) aims to improve consistency and make the process less complex by giving a precise definition of fair value and a single measurement source of the fair value and disclosure requirements applicable to IFRS. The requirements which, to a large extent, have reached consistency between the International Financial Reporting Standards and the US Generally Accepted Accounting Principles (USGAAP), do not expand the fair value reporting, but give guidance on how to use it when needed or allowed under other IFRS or GAAP standards.

BDIF Management considers the impact that the above stated amendments to the standards could have on BDIF’s financial result, as well as when it will approve them.

Other new and amended standards and interpretations, which are not likely to have any impact on these financial statements: The amendment to IAS 12 ‘Income Taxes’ — Return on Investment Assets (issued in December 2010 and effective for annual periods commencing on or after 1 January 2013) expresses a rebuttable presumption that investment property measured at fair value will be entirely recovered through sale.

56

Bulgarian Deposit Insurance Fund Annual Report for 2013

The amendment to IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ regarding hyperinflation and removal of references to fixed dates of some exceptions and releases (issued in December 2010 and effective for annual periods commencing on or after 1 January 2013).

IFRS 10 ‘Consolidated Financial Statements’ (issued in May 2011 and effective for annual periods beginning on or after 1 January 2014).

IFRS 11 ‘Joint Agreements’ (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013).

IFRS 12 ‘Disclosing of Interest in Other Entities’ (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013).

IAS 27 ‘Consolidated and Separate Financial Statements’ (revised in May 2011 and effective for annual periods beginning on or after 1 January 2014) was amended to give accounting disclosure requirements related to investments in subsidiaries, jointly controlled entities, and associates when the entity prepares its separate financial statements. IFRS 10 ‘Consolidated Financial Statements’ replaced those parts in IAS 27 giving guidance on control and consolidated financial statements.

The amended IAS 28 ‘Investments in Associates and Joint Ventures’ (revised in May 2011 and effective for annual periods beginning on or after 1 January 2014) applies the equity method in the assessment of investments in associates and joint ventures. (d) New or amended standards and interpretations not yet endorsed by the European Union IFRS 9 ‘Financial Instruments: Classification and Measurement’. The key characteristics of the standard issued in November 2009 and amended in October 2010, December 2011 and November 2013 are: It requires that financial assets are classified in two measurement categories: those that shall be subsequently measured at fair value and those that shall be subsequently measured at amortised cost. That determination is made at initial recognition. The classification depends on the business model used by the entity to manage financial instruments and on the contractual cash flows of the instrument.

An instrument is measured subsequently at amortised cost only if this is a debt instrument and meets the following two criteria: (а) the objective of the entity’s business model is to hold the financial asset to collect the contractual cash flows; and (b) contractual cash flows of the asset are payments of principal and interest (see Key Loan Characteristics). All other debt instruments are priced at fair value through profit or loss.

All equity instruments are subsequently measured at fair value. Available for sale equity instruments are measured at fair value through profit or loss. For all other equity investment the entity may elect on initial recognition the unrealised and realised gains and losses to be recognised in other comprehensive income rather than in the profit or loss. Own credit profit and loss are not to be subsequently transferred to profit or loss. This choice may be made on an instrument-by-instrument basis. Dividends shall be recognised in profit or loss, as long as they represent return on investment.

Most of the IAS 39 requirements regarding the classification and measurement of financial liabilities were not changed in IFRS 9. The main change is that the entity shall be required to present the effects of the changes in its credit risk of the financial liabilities, recognised at fair value through the

57

Bulgarian Deposit Insurance Fund Annual Report for 2013

profit or loss or in other comprehensive income.

Hedge accounting requirements were amended to be brought more into line with risk management practices. The standard provides the entities the possibility to choose their accounting policy between the IFRS 9 requirements or to continue to apply the accounting requirements of IAS 39 for all hedges as the standard does not deal with the macro hedge accounting.

The amendment to IFRS 9 in November 2013 removed the mandatory effective date. The European Union has not yet approved IFRS 9.

BDIF Management considers the impact that the above stated amendments to the standards could have on BDIF’s financial result, as well as when it will approve them.

Other amendments to the standards and interpretations not likely to have any impact on these financial statements: ‘Offsetting of Financial Assets and Financial Liabilities’ — Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added guidance on the application of IAS 32 to address the inconsistencies identified with certain offsetting requirements. This includes clarification of the meaning of ‘currently has a contractual right of setoff’ and states clearly that gross settlement mechanisms are effectively equivalent to net settlement.

Amendments to IFRS 10, IFRS 12 and IAS 27 ‘Investment Entities’ (issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014). The amendment introduces the term of ‘investment entity’ to refer to an entity that: (i) obtains funds from investors for the purpose of providing investment management services, (ii) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation or investment income, and (iii) measures and evaluates the performance of its investments on a fair value basis. The investment entity is required to report its subsidiaries at fair value through profit or loss and to consolidate only those that provide services that relate only to the investment entity’s own investment activities. IFRS 12 was amended to implement disclosure requirements, including those related to significant judgements of whether an entity is an investment entity, and to the information about financial or other support to an unconsolidated subsidiary regardless of whether there is only an intention to provide this support or it has already been provided.

IFRIC 21 Levies (issued on 20 May 2013 and effective for the annual periods beginning on or after 1 January 2014, still not approved by the European Union). The interpretation defines the criteria to recognise a liability for a levy, other than income tax. The obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the respective legislation. The same recognition requirements apply to both interim and annual financial statements.

Amendments to IAS 36 ‘Recoverable Amount Disclosures’ (issued in May 2013 and effective for annual periods beginning on or after 1 January 2014; earlier application is permitted if the requirements of IFRS 13 are applied for both current and past periods). The amendments remove the requirement to disclose recoverable amounts, when the cash-generating unit contains goodwill or intangible assets with indefinite useful lives and when the cash generating unit is not impaired.

Amendments to IAS 39 ‘Novation of Derivatives and Continuation of Hedge Accounting’ (issued in June 2013 and effective for the annual periods beginning on or after 1 January 2014). The amendments provide an exception to the requirement to discontinue hedge accounting when certain crite-

58

Bulgarian Deposit Insurance Fund Annual Report for 2013

ria are covered by the novation of the hedging instrument to a central counterparty.

Amendments to IAS 19 ‘Defined Benefit Plans: Employee Contributions’ (issued in November 2013 and effective for the annual periods beginning on or after 1 July 2014). The amendment allows entities to recognise employee contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service if the amount of the contributions is independent of the number of years of service.

Unless mentioned otherwise above, the standards and amendments are not expected to impact the Fund’s financial statements.

The financial statements have been prepared on historical cost basis except for available-for-sale financial instruments, which are measured at fair value.

BDIF maintains its accounting books in Bulgarian lev (BGN), which is accepted as being its presentation currency. The data in the financial statements and the notes thereto are presented in thousands of Bulgarian levs (BGN’000) except where it is explicitly stated otherwise.

The presentation of the financial statements in accordance with International Financial Reporting Standards requires the management to make best estimates, accruals and reasonable assumptions that affect the reported values of assets and liabilities, income and expenses and the disclosure of contingent receivables and payables at the date of the financial statements. These estimates, accruals and assumptions are based on the information, which is available at the date of the financial statements, and therefore, the future actual results might be different from them (in the conditions of financial crisis the uncertainties are more significant). The items presuming a higher level of subjective assessment or complexity or where the assumptions and accounting estimates are material for the financial statements are disclosed in Note 2.11.

2.2. Comparatives In these financial statements, BDIF presents comparative information for one prior year.

Where necessary, comparative data is reclassified (restated) in order to achieve compatibility in view of the current year presentation changes.

2.3. Functional currency and recognition of exchange differences The functional and presentation currency of BDIF is the Bulgarian lev. As of 1 July 1997 the Bulgarian lev was fixed under the Law on the Bulgarian National Bank to the German mark at the ratio of BGN 1 : DEM 1, and with the introduction of the euro as the official currency of the European Union, it was fixed to the euro at a ratio of BGN 1.95583 : EUR 1.

Upon its initial recognition, a foreign currency transaction is recorded in the functional currency whereas the exchange rate at the date of the transaction or operation is applied to the foreign currency amount. Cash, receivables and payables, as monetary reporting items, denominated in foreign currency, are recorded in the functional currency by applying the exchange rate as quoted by the Bulgarian National Bank for the last working day of the respective month. At 31 December these amounts are presented in Bulgarian levs at the closing exchange rate of the BNB. The non-monetary items in the statement of financial position, which are initially denominated in a foreign currency, are accounted for in the functional currency by applying the historical exchange rate at the date of the transaction and are not subsequently revalued at the closing exchange rate.

59

Bulgarian Deposit Insurance Fund Annual Report for 2013

Foreign exchange gains or losses arising from the settlement or recording of foreign currency transactions at rates different from those at which they were converted on initial recognition, are recognised in the statement of operations (within the result for the year) in the period in which they arise and are treated as ‘other income/(losses)’ and presented net.

2.4. Premium contributions income Premium contributions income represents the entry and annual contributions to BDIF from banks having a license granted by the BNB. The payment deadline for the entry contribution is thirty days after a bank is entered in the Commercial Register while for the annual contributions of licensed banks, it is 31 March of the current year (Articles 15 and 16, paragraph 5 of the Law on Bank Deposit Guarantee). Premium contributions income is recognised in the statement of operations (within the result for the year) on the date when the contributions become due under law. After this date, penalty interest for delay is charged and presented as ‘other income/(losses), net’ on the face of the statement of operations. It is calculated on a statutory interest basis.

2.5. Investment income Investment income includes interest on deposits of BDIF with the BNB and on government securities held, realised gains and losses from sales and revaluation of financial instruments carried at fair value through profit and the accumulated effects from revaluation of sold or written-off financial assets classified as available-for-sale. The effects from net change in the fair value of available-for-sale financial assets (change in available-for-sale financial assets revaluation reserve) are reported as a change in other component of BDIF’s net assets in the statement of operations.

Interest income is recognised in the statement of operations (within the result for the year) for all financial instruments and is accrued currently on a time basis by applying the effective interest method. They also include premium/discount amortisation and any other difference between the original cost and the settlement value (repayment or disposal) of the financial instrument.

2.6. Financial instruments Classification BDIF classifies its financial instruments depending on the nature and purpose (designation) of the financial assets and liabilities at the date of their acquisition. The management determines the classification of the financial assets of the BDIF at the date of their initial recognition in the statement of financial position.

BDIF usually classifies its financial assets in two basic categories: ‘loans and receivables’ (including cash and cash equivalents) and ‘available-for-sale securities’. Financial liabilities arise mostly in relation with the obligations assumed by BDIF to depositors in connection with the guaranteed amounts on their deposits with banks with revoked licenses. The common liabilities to counterparts arising in the course of the ordinary activities of BDIF are classified as other financial liabilities.

Initial recognition Financial instruments are recognised in the statement of financial position at the time when BDIF becomes a party to a financial instrument-related contract, on ‘the date of settlement’. Under this approach, the instrument is recognised on the date when it is transferred to BDIF.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Initial measurement Upon initial acquisition or origination, financial assets and liabilities are measured at their fair value equal to the acquisition cost. With regard to the available-for-sale financial assets it represents the fair value and all directly attributable transaction costs.

Subsequent measurement Following the initial recognition, financial assets held by BDIF are measured at fair value or amortised cost depending on their classification while financial liabilities — at amortised cost determined under the effective interest rate method.

The effects of revaluation of available-for-sale financial assets are recognised as other component of net assets in the statement of operations of BDIF and are included in the ‘comprehensive result’ item for the respective period (Note 2.5). In case of a sale and/or write-off of financial assets, the accumulated effects are recognised currently in the statement of operations (within the result for the year) as ‘investment income’.

Gains and losses on revaluation to fair value Gains or losses arising from a change in the fair value of a financial asset classified as available-for-sale are components of the net assets of BDIF and are initially recognised in the statement of operations under other components of net assets in the item ‘net change in fair value of available-for-sale financial assets’, while in case of a sale and/or write-off the accumulated effects are recognised within the current result for the year under ‘investment income’.

Gains and losses from a revaluation of a financial asset measured at fair value are included currently in the statement of operations (within the result for the year) for the period when they arise.

Impairment At the end of each reporting period BDIF assesses whether objective circumstances exist representing indicators for permanent impairment of each individual financial asset, which is not measured at fair value through the statement of operations (within the result for the year). Where a significant and/ or permanent decrease in the fair value of a certain asset exists compared to its acquisition cost it is assumed that impairment has occurred. The impairment amount is equal to the difference between the carrying value of the asset and its recoverable value, which represents its current fair value.

Derecognition Financial assets or parts of them are derecognised from the statement of financial position where BDIF: - receives economic benefits from its contractual rights; or - loses control over the right to receive economic benefits from its contractual rights; or - the term of such a right has expired; or - waives such a right.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Financial liabilities are derecognised from the statement of financial position where: - the liability is settled; or - the liability is dropped off; or - the term for settlement has expired.

Types of financial instruments a. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and at current accounts, bank time deposits with original maturity of up to three months in Bulgarian levs and in foreign currency. Cash in hand and at current accounts is presented at nominal value. Cash on time deposits is presented on the statement of financial position at amortised cost determined by applying the effective interest method, i.e. together with the accrued interest due.

For the purposes of the statement of cash flows, special purpose blocked deposits and accrued interest on non-matured time deposits are not treated as cash and cash equivalents. b. Available-for-sale investments Available-for-sale securities are recognised in and derecognised from the statement of financial position on the date of settlement when the purchase or sale is performed by virtue of a contract providing submission (transfer) of securities within definite time determined by the capital market and laws regulating transactions in securities. They are initially valued at cost, comprising their purchase price and all directly attributable transaction costs.

Available-for-sale investments are subsequently measured at fair value. The fair value of securities quoted in active markets is determined on the basis of bid price published quotations in the active market or those of actively trading Bulgarian banks and/or Bulgarian and foreign banks for the issues of Bulgarian securities traded in international markets. Where the market of particular financial assets is not active or these assets are not quoted, BDIF establishes their fair value through other valuation methods. They include: â&#x20AC;&#x2DC;reference pricesâ&#x20AC;&#x2122; by comparison with the market price of another similar financial instrument in recently realised armâ&#x20AC;&#x2122;s length transactions; discounted cash flow calculations and analysis of such instrument; fair value determination on the basis of options of expected yield from the asset and other valuation techniques usually used by capital market participants. c. Receivables from counterparts Receivables from counterparts are presented at cost less the allowance for bad debts. An estimate of allowances for doubtful and bad debts is made when significant uncertainty exists as to the collection of the full amount or a part of it. Bad debts are written-off when the legal grounds for this are available. d. Payables to counterparts Payables to counterparts are presented at the original invoice amount (cost) which is assumed to be the fair value of the transaction, which will be paid in the future against the goods and services received.

62

Bulgarian Deposit Insurance Fund Annual Report for 2013

e. Payables to depositors of banks with revoked licenses under guaranteed deposit amounts Payables to depositors of banks with revoked licenses under guaranteed deposit amounts are presented as fair estimates on statutory payable amount at the date of license revocation of the respective bank for each individual entity regardless of the number and deposit amounts thereof. The specified amount includes also the interest accrued at the date of the BNB decision for revoking the bankâ&#x20AC;&#x2122;s license (Article 4 of the Law on Bank Deposit Guarantee). The amounts due are determined on the basis of lists, assessments and data, provided by the conservator, liquidator or trustee of the respective bank with revoked license, regarding its depositors and deposit accounts.

The management assumes that these payables represent financial liabilities because the underlying initial obligation is resultant from the contractual relation and its settlement is connected with cash payment.

2.7. Property and equipment Property and equipment (tangible fixed assets) are presented in the financial statements at historical cost of acquisition (cost) less the accumulated depreciation and any impairment losses in value.

Initial measurement Upon their initial acquisition, property and equipment are valued at acquisition cost (cost), which comprises the purchase price, including customs charges and any directly attributable costs of bringing the asset to working condition for its intended use. The directly attributable costs include: the cost of site preparation, initial delivery and handling costs, installation costs, professional fees for people involved in the project, non-refundable taxes etc.

BDIF has determined a value threshold of BGN 700 under which the acquired assets regardless of their non-current asset character are written out as a current expense at the moment of their acquisition.

Subsequent measurement The approach chosen by BDIF for subsequent measurement of property and equipment is the cost model under IAS 16, i.e. the acquisition cost (cost) less any accumulated depreciation and any accumulated impairment losses in value.

Depreciation methods BDIF applies the straight-line depreciation method for tangible fixed assets. Land is not depreciated.

The useful life by group of assets has been determined considering: the physical wear, the characteristic features of the equipment, the intentions for future use and the expected obsolescence, and is as follows: Useful life Buildings

25

Machinery and equipment (computers)

4

Motor vehicles

4

Fixtures and fittings

7

Other tangible fixed assets

3

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Bulgarian Deposit Insurance Fund Annual Report for 2013

The useful life, set for any tangible fixed asset, is reviewed at each year-end and in case of any material deviation from the future expectations of their period of use, the latter is adjusted prospectively.

Subsequent expenditure Repair and maintenance costs are recognised as current expenses as incurred. Subsequent expenses incurred in relation to property and equipment having the nature of replacement of certain components, significant parts and aggregates or improvements and restructuring, are capitalised in the carrying amount of the respective asset whereas the residual useful life is reviewed at the capitalisation date. At the same time, the non-depreciated part of the replaced components is derecognised from the carrying amount of the assets and is recognised in the current expenses for the period of restructuring.

Impairment of assets BDIF performs a review for impairment of property and equipment when events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. If any such indications exist that the estimated recoverable amount of an asset is lower than its carrying value, the latter is adjusted to the recoverable amount of the asset. The recoverable amount of assets within the ‘property and equipment’ group is the higher one: the fair value less costs to sell or the value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market conditions and assessments of the time value of money and the risks specific to the particular asset. Impairment losses are reported in the statement of operations (within the result for the year).

Gains and losses on disposal (sale) Tangible fixed assets are derecognised from the statement of financial position when they are permanently disposed of and no future economic benefits are expected therefrom or are sold. The gains or losses arising from the sale of an item from the ‘property and equipment’ group are determined as the difference between the consideration received and the carrying amount of the asset at the date of sale. They are stated net under ‘other income/(losses), net’ on the face of the statement of operations.

2.8. Intangible assets Intangible assets are stated in the financial statements at acquisition cost (cost) less accumulated amortisation and any impairment losses in value. They include software licenses.

BDIF has adopted the straight-line amortisation method for the intangible assets at set useful life of two to four years. The carrying value of the intangible assets is subject to review for impairment when events or changes in the circumstances indicate that the carrying value might exceed their recoverable amount. Impairment losses are then included in the statement of operations (within the result for the year).

2.9. Pensions and other payables to personnel under the social security and labour legislation The employment and social security relations with the employees of the Bulgarian Deposit Insurance Fund are based on the provisions of the Labour Code and the effective social security legislation in Bulgaria.

The major duty of BDIF in its capacity as employer is to make the mandatory social security contribu-

64

Bulgarian Deposit Insurance Fund Annual Report for 2013

tions for the hired employees to the Pensions Fund, the Supplementary Mandatory Pension Security, the General Diseases and Maternity Fund, the Unemployment Fund, the Labour Accident and Professional Diseases Fund, and for health insurance. The rates of the social security and health insurance contributions are defined under the Law on the Budget of State Social Security and the Law on the Budget of National Health Insurance Fund for the respective year. The contributions are split between the employer and employee in line with rules of the Social Security Code.

The social security and pension plans, applied by BDIF in its capacity as employer, are based on the Bulgarian legislation and are defined contributions plans. Under these plans, the employer pays defined monthly contributions to the government funds as follows: Pensions Fund, General Diseases and Maternity Fund, Unemployment Fund, Labour Accident and Professional Diseases Fund as well as to universal and professional pension funds, on the basis of rates fixed by law, and has no legal obligation to pay any additional amounts to the funds in cases where the latter do not hold sufficient assets to pay the respective individuals the benefits they have worked out over the period of their service. The obligations referring to health insurance are analogous.

There is no established and functioning private voluntary social security scheme at BDIF. Short-term benefits Short-term employee benefits in the form of remuneration, bonuses and social payments and benefits (payable within 12 months after the end of the period when the employees have rendered the service or has met the required terms and conditions) are recognised as an expense in the statement of operations (within the result for the year) in the period when the service thereon has been rendered or the requirements for their receipt have been met and as a current liability (less any amounts already paid and deductions due) at their undiscounted amount. BDIF payables for social security and health insurance are recognised as a current expense and liability at their undiscounted amount together with the respective benefits they relate to and within the period of their accrual.

At each financial statements date BDIF measures and recognises the expected costs on the accumulating compensated absences, which amount is expected to be paid as a result of the unused entitlement. The measurement includes the estimated expenses on the employeeâ&#x20AC;&#x2122;s remuneration and the statutory social security and health insurance contributions due by the employer thereon.

Long-term retirement benefits In accordance with the requirements of the Labour Code the employer is obliged to pay to its personnel upon retirement an indemnity, which depending on the length of service with the entity varies between two and six gross monthly salaries at the termination date of the employment. In their nature these are defined benefit schemes.

The calculation of the amount of these liabilities necessitates the participation of qualified actuaries to determine their present value at the date of the financial statements, at which they are included in the statement of financial position, adjusted for the amount of the unrecognised actuarial gains and losses, and respectively, the change in their value including the recognised actuarial gains and losses â&#x20AC;&#x201D; in the statement of operations (within the result for the year).

Past service costs are recognised immediately in the statement of operations (within the result for the year).

At each financial statements date, BDIF assigns certified actuaries who provide their report with

65

Bulgarian Deposit Insurance Fund Annual Report for 2013

calculations regarding the long-term retirement benefit obligations. For this purpose, they apply the Projected Unit Credit Method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows, which are expected to be paid within the maturity of this obligation, and using the interest rates of long-term government bonds denominated in Bulgarian levs.

Actuarial gains and losses arise from changes in the actuarial assumptions and experience adjustments. Those exceeding the 10-per cent corridor of the present value of the defined benefit obligations at the end of the year are recognised immediately in the statement of operations (within the result for the year) for the period in which they arise.

The changes in the amount of BDIF’s liabilities to the personnel for indemnities upon retirement, including the interest from unwinding of the present value and the recognised actuarial gains or losses, are recognised as ‘expenses on personnel’ in the statement of operations (within the result for the year).

Termination benefits In accordance with the provisions of the Labour Code, BDIF in its capacity as employer is obliged, upon termination of the employment contracts prior to retirement, to pay certain types of indemnities.

BDIF recognises employee benefit obligations on employment termination before the normal retirement date when it is demonstrably committed, based on an announced plan, to terminating the employment contract with the respective individuals without possibility of withdrawal or in case of formal issuance of documents for voluntary redundancy. Termination benefits due more than 12 months are discounted and presented in the statement of financial position at their present value.

2.10. Income taxes BDIF is exempt from state and local taxes, as well as charges on deposit guarantee transactions under the Law on Bank Deposit Guarantee.

2.11. Critical accounting judgements on applying BDIF’s accounting policies. Key estimates and assumptions of high uncertainty Measurement of available-for-sale financial instruments The government securities, held by BDIF, acquired for the purpose of additional income from cash accumulated on the basis of guaranteed banks contributions and for maintenance of the needed high liquidity, are classified as available-for-sale financial assets because the management is of the opinion that its intentions towards these assets, as well as their functionality are best reflected in this way.

Domestic government securities are measured at the average bid price based on the quotations of actively trading banks for the purposes of BDIF revaluation of domestic government securities on a monthly basis (Level 1), with the quotations outside the 95 per cent confidence interval eliminated, while foreign government securities are revalued at the average bid price based on the quotations of actively trading banks for the purposes of BDIF revaluation of foreign government securities on a monthly basis. (Note 2.6).

The negative changes in the prices of government securities held by BDIF are treated as temporary and presented in the changes of other components of net assets of the BDIF.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Provisions Since as of the Report date there are no banks with a revoked license, there is no need for provisions to be allocated in the balance sheet (statement of financial position) of the BDIF.

3. PREMIUM CONTRIBUTIONS In 2013 BDIF accrued contributions from 26 banks at the amount of BGN 246,312 thousand (2012: BGN 218,713 thousand from 26 banks). The total amount of average daily deposits (of year 2012) used for defining the contributions for 2013 amounted to BGN 49,262,329 thousand (2012: BGN 43,738,526 of 2011).

The amount of BGN 246,312 thousand was the result of the annual premium contributions of 26 banks for 2013.

The amount of BGN 218,713 thousand was the result of the annual premium contributions of 26 banks for 2012.

4. INVESTMENT INCOME

Interest income from government securities Interest income from deposits Net gains/(losses) from sale/maturity of government securities

2013 BGN’000

2012 BGN’000

19,319

27,032

–

3

30

196

19,349

27,231

(5,962)

12,400

(50)

(108)

(6,012)

12,292

2013 BGN’000

2012 BGN’000

(1,920)

(1,141)

4

7

(1,916)

(1,134)

Other components of BDIF net assets — income recycling Change in the fair value of available-for-sale financial assets: (Losses)/gains from revaluation during the year Less: Adjustment from reclassification of (gains)/losses included in the result for the current year

5. OTHER INCOME AND LOSSES, NET

Net gains/(losses) from revaluation and foreign currency transactions Penalty interest for delay

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Bulgarian Deposit Insurance Fund Annual Report for 2013

6. GENERAL ADMINISTRATIVE COSTS 2013 BGNâ&#x20AC;&#x2122;000

2012 BGNâ&#x20AC;&#x2122;000

Salaries and social security contributions for personnel

686

654

Remuneration and social security contributions under management contracts

264

253

5

4

82

143

Subscription to information publications and networks

121

106

Depreciation

108

76

Business trips

37

56

Hospitality expenses

16

20

Telecommunication and postal services

10

12

Training and qualification

15

8

Rentals

1

1

Sundry

111

126

1,456

1,459

Remuneration for temporarily hired personnel Office maintenance

Salaries and social security contributions of the personnel accounted for BGN 686 thousand (2012: BGN 654 thousand) and included staff remuneration and social security contributions under employment contracts to the amount of BGN 570 thousand (2012: BGN 525 thousand) and social benefits and contributions of BGN 116 thousand (2012: BGN 129 thousand).

Remunerations under management contracts include the remunerations and related social security payments to the members of the Management Board of BDIF. Expenses on office maintenance include mainly expenses on local taxes and charges, insurance, energy costs (electric energy and heating), security services, water, stationery and sanitary and hygienic materials, etc.

Expenses on subscription to information publications and networks include mainly subscriptions for database access to one of the major rating agencies: Bloomberg.

Other costs include bank and other charges paid.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

7. CASH AND CASH EQUIVALENTS 31 December 2013 BGNâ&#x20AC;&#x2122;000

31 December 2012 BGNâ&#x20AC;&#x2122;000

2

1

66

2,073

1,631

2,188

One-week term deposits in BGN

651,000

598,000

One-week term deposits in foreign currency

396,496

246,434

1,049,195

848,696

Cash in hand Current accounts in BGN Current accounts in foreign currency

The existing cash as at 31 December 2013 and 31 December 2012 were at current accounts and term deposits with the Bulgarian National Bank.

Interest rates on current and deposit accounts were as follows:

2013

2012

BGN

0%

0%

EUR

0%

0%

USD

0%

from 0% to 0.15%

Interest rates on deposit accounts in original currency

69

Bulgarian Deposit Insurance Fund Annual Report for 2013

8. AVAILABLE-FOR-SALE SECURITIES А. Classification of securities based on original maturity

31 December 2013

Nominal value

Fair value

Effective interest rate %

Maturity

BGN’000

Interest rate (coupon) %

BGN’000 Short-term discount government securities

41,221

41,078

–

0.56

2014

Medium-term interestbearing government securities

482,496

502,699

1.50-4.45

0.45-6.81

2014-2017

Long-term interestbearing government securities

231,453

243,485

0.02-8.25

0.90-6.80

2014-2019

755,170

787,262

Nominal value

Fair value BGN’000

Effective interest rate %

Maturity

BGN’000

Interest rate (coupon) %

Medium-term interestbearing government securities

303,820

320,222

2.25-4.45

0.51-6.81

2013-2017

Long-term interestbearing government securities

383,961

411,173

0.06-8.25

0.77-8.81

2013-2019

687,781

731,395

31 December 2012

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Bulgarian Deposit Insurance Fund Annual Report for 2013

B. Classification of securities based on residual maturity

31 December 2013

Effective interest rate %

Maturity date

BGN’000

Interest rate (coupon) %

41,221

41,078

–

0.56

2014

Short-term interest-bearing government securities

227,601

231,490

2.25-5.20

0.45-6.81

2014

Medium-term interest-bearing government securities

486,348

514,694

0.02-8.25

0.90-6.80

2015-2019

Long-term interest-bearing government securities

–

–

755,170

787,262

Nominal value

Fair value BGN’000

Effective interest rate %

Maturity date

BGN’000

Interest rate (coupon) %

–

–

–

–

Short-term interest-bearing government securities

187,715

199,519

4.25-7.50

1.74-8.81

2013-2013

Medium-term interest-bearing government securities

410,809

440,231

0.06-8.25

0.51-6.81

2014-2017

Long-term interest-bearing government securities

89,257

91,645

0.13-6.00

0.77-6.71

2018-2019

687,781

731,395

Discount government securities

31 December 2012

Discount government securities

Nominal value

Fair value

BGN’000

71

Bulgarian Deposit Insurance Fund Annual Report for 2013

BDIF has opened securities registers with the following primary dealers, sub-depositories of securities: DSK Bank EAD, Corporate Commercial Bank AD, United Bulgarian Bank AD, First Investment Bank AD, Raiffeisenbank (Bulgaria) EAD, Societe Generale Expressbank AD, UniCredit Bulbank AD, Eurobank Bulgaria AD and Citibank N.A. — Sofia Branch.

As at 31 December 2013 and 31 December 2012 BDIF had open exposures only to Bulgarian sovereign debt (Bulgarian government bonds).

9. PROPERTY AND EQUIPMENT Land and buildings

Motor vehicles

Total

BGN’000

Office equipment and furniture BGN’000

BGN’000

BGN’000

1,005

340

51

1,396

–

42

–

42

1,005

382

51

1,438

Additions

–

26

–

26

Derecognised

–

(47)

–

(47)

1,005

361

51

1,417

235

294

39

568

34

24

10

68

269

318

49

636

34

40

2

76

–

(47)

–

(47)

Accumulated depreciation as at 31 December 2013

303

311

51

665

Carrying amount as at 31 December 2012

736

64

2

802

Carrying amount as at 31 December 2013

702

50

–

752

Book value as at 1 January 2012 Additions Carrying amount as at 31 December 2012

Carrying amount as at 31 December 2013 Accumulated depreciation as at 1 January 2012 Depreciation charge for the year Accumulated depreciation as at 31 December 2012 Depreciation charge for the year Derecognition of depreciated assets no longer in use

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Bulgarian Deposit Insurance Fund Annual Report for 2013

As at 31 December 2013 BDIF owned land at the amount of BGN 163 thousand (31 December 2012: BGN 163 thousand) and a building with a carrying amount of BGN 539 thousand (31 December 2012: BGN 573 thousand) to the total amount of BGN 702 thousand.

As at 31 December 2013 and 31 December 2012 there were no established encumbrances (mortgages and pledges) on BDIF’s property and equipment.

10. INTANGIBLE AND OTHER ASSETS А. Intangible assets Software BGN’000 Book value as at 1 January 2012

123

Additions

30

Book value as at 31 December 2012

153

Additions

–

Book value as at 31 December 2013

153

Accumulated amortisation as at 1 January 2012

89

Depreciation charge for the year

8

Accumulated amortisation as at 31 December 2012

97

Depreciation charge for the year

32

Accumulated amortisation as at 31 December 2013

129

Carrying amount as at 31 December 2012

56

Carrying amount as at 31 December 2013

24

B. Other assets Other assets include: 31 December 2013 BGN’000

31 December 2012 BGN’000

Prepayments

7

9

Advances granted

4

11

11

20

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Bulgarian Deposit Insurance Fund Annual Report for 2013

11. OTHER LIABILITIES 31 December 2013 BGN’000

31 December 2012 BGN’000

Payables to personnel

37

38

Payables to suppliers

10

11

47

49

Payables to personnel represent current obligations on unused paid annual leave of BDIF employees at the amount of BGN 24 thousand (31 December 2012: BGN 27 thousand) and long-term payables as indemnities on retirement amounting to BGN 13 thousand (31 December 2012: BGN 11 thousand). Payables to suppliers amounted to BGN 10 thousand (31 December 2012: BGN 11 thousand) and include all expenses incurred in December 2013 but actually paid in January 2014 on receipt of the respective invoices.

12. FINANCIAL RISK MANAGEMENT In the ordinary course of its business activities, BDIF is exposed to a variety of financial risks, the most important of which are market risk (including currency risk, risk of a change in the fair value and price risk), credit risk, liquidity risk and risk of interest-bearing cash flows. General risk management is focused on the difficulty to forecast financial markets and to achieve minimisation of the potential negative effects that might affect the financial results and position of BDIF. Financial risks are currently identified, measured and monitored through various control mechanisms introduced to assess adequately the market circumstances of its investments and the ways for maintenance of free liquid funds through preventing undue risk concentration.

The management strives to improve the methods for assessment and management of risks related to the investment portfolio: credit, liquidity, interest and currency risks, while performing one of its major functions: the secure investment of funds and payment of the guaranteed deposits with banks.

With the objective of minimising risks, BDIF maintains modified portfolio duration of no longer than 2.5 and determines limits for deposits and securities dealings with a repurchase clause (repo agreements) with banks.

The investment policy approved by BDIF Management Board includes a Currency Risk Management Methodology for payment of guaranteed deposits denominated in currencies other than BGN and EUR. With the aim of limiting currency risks while covering guaranteed deposits in foreign currency, it has been decided a currency exposure in USD to be maintained. Investments in instruments denominated in USD should not exceed the maximum amount, which is determined periodically in accordance with the Currency Risk Management Methodology.

BDIF’s management reviews the investment strategy on a regular basis and monitors the structure of financial assets and liabilities on the basis of information provided regularly by the Risk Assessment and Analysis Department, Treasury Department, Finance and Accounting Department and Bank Bankruptcy and Early Intervention Department.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

The structure of BDIF’s financial assets and liabilities as at 31 December by category is presented in the table below: 31 December 2013 BGN’000

31 December 2012 BGN’000

1,049,195

848,696

787,262

731,395

1,836,457

1,580,091

10

11

10

11

Financial assets ‘Loans and receivables’ category Cash and cash equivalents ‘Available-for-sale financial assets’ category Available-for-sale government securities

Financial liabilities ‘Other financial liabilities’ category Other liabilities

BDIF had no outstanding contingent financial commitments as at 31 December 2013 and 31 December 2012.

Market risk a. Currency risk The currency risk is related to the adverse movements of exchange rates of other currencies towards the reporting currency, the Bulgarian lev, in future business transactions on foreign currency assets and liabilities recognised in the statement of financial position. BDIF is exposed to currency risk of changes in the exchange rate of the US dollar to the Bulgarian lev with a view of its open exposures denominated in US dollars. As far as the existing exposures are short-term ones and there is a set maximum limit for the exposure in US dollars according to the investment policy, the management is of the opinion that the risk is under control. BDIF has no other outstanding currency risks because the remaining operations are deals denominated in BGN and/or in EUR, while the Bulgarian lev is fixed to the euro by law.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

The tables below represent a summary of BDIF’s exposure to currency risk:

Currency structure analysis

As at 31 December 2013

USD

EUR

BGN

Total

BGN’000

BGN’000

BGN’000

BGN’000

Cash and cash equivalents

2,162

395,965

651,068

1,049,195

Available-for-sale securities

42,910

265,748

478,604

787,262

45,072

661,713

1,129,672

1,836,457

–

–

10

10

–

–

10

10

USD

EUR

BGN

Total

BGN’000

BGN’000

BGN’000

BGN’000

Cash and cash equivalents

252

248,371

600,073

848,696

Available-for-sale securities

34,660

326,477

370,258

731,395

–

–

–

–

34,912

574,848

970,331

1,580,091

–

–

11

11

–

–

11

11

Financial assets

Financial liabilities Other liabilities

As at 31 December 2012

Financial assets

Receivables from banks

Financial liabilities Other liabilities

Foreign currency sensitivity analysis The table below demonstrates the sensitivity to a 10 per cent increase/decrease in the current exchange rate of BGN against USD based on the structure of foreign currency denominated assets and liabilities of BDIF as at 31 December with an assumption that the influence of all other variables is ignored. The effect is measured and presented as an impact on the result and directly on the net assets with all other conditions held constant.

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Bulgarian Deposit Insurance Fund Annual Report for 2013

USD 2013 BGN’000

2012 BGN’000

Financial result (profit or loss) — increase

4,507

3,491

Net assets (through the financial result) — increase

4,507

3,491

Financial result (profit or loss) — decrease

(4,507)

(3,491)

Net assets (through the financial result) — decrease

(4,507)

(3,491)

On a 10 per cent increase in the rate of USD against BGN, the final effect on the financial result of BDIF for a one-year period would be an increase by BGN 4,507 thousand (31 December 2012: BGN 3,491 thousand) mostly due to the impact of the exposure of securities denominated in USD. Respectively, the impact on net assets would be the same.

On a 10 per cent decrease in the exchange rate of USD against BGN, the final effect on the result of BDIF would be equal and reciprocal to the increase described above.

In management’s opinion, the above currency sensitivity analysis based on the structure of foreign currency denominated assets and liabilities in the statement of financial position is representative for the currency sensitivity of BDIF for the reporting year.

b. Price risk BDIF is exposed to a price risk related to the securities held thereby and classified as ‘available-forsale’. As mentioned above, in order to minimise this risk, BDIF invests liquid funds in Bulgarian government securities. The management has established procedures for ongoing monitoring of price changes, yields and maturity structure of government securities and respectively for undertaking timely measures and actions when indicators exist for more lasting adverse trends.

The analysis of BDIF’s sensitivity to the price of debt securities held thereby is based on the state and structure of investments as at 31 December. If these prices were changed by a 3 per cent increase/ decrease, the effect as at this date would impact directly the net assets as far as debt securities are classified as available-for-sale and their revaluation is carried directly to a component thereof. This effect would be as follows: 2013 BGN’000

2012 BGN’000

Net assets (through another component of the other comprehensive result — financial assets revaluation reserve) — increase

23,618

21,942

Net assets (through another component of the other comprehensive result — financial assets revaluation reserve) — decrease

(23,618)

(21,942)

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Bulgarian Deposit Insurance Fund Annual Report for 2013

c. Interest rate risk Interest risk arises from the possibility that changes in interest rates might result in changes in the future cash flows or in the fair values of financial instruments.

BDIF has a significant portion of interest-bearing assets. Nevertheless, income and operating cash flows are largely independent from market interest rate fluctuations because the assets are mainly with fixed interest rates. The profitability of BDIF’s deposits with the BNB follows the reference quotations of the Bank for International Settlements, Basel. In addition, BDIF is not exposed to interest risk related to its liabilities because they are usually interest-free.

The table below presents the structure of financial instruments depending on the type of contractual interest rates.

31 December 2013

with floating interest % BGN’000

with fixed interest % BGN’000

interestfree BGN’000

Total BGN’000

Cash and cash equivalents

–

1,047,496

1,699

1,049,195

Available-for-sale securities

68,738

718,524

–

787,262

68,738

1,766,020

1,699

1,836,457

–

–

10

10

–

–

10

10

with floating interest % BGN’000

with fixed interest % BGN’000

interestfree BGN’000

Total BGN’000

Cash and cash equivalents

–

844,435

4,261

848,696

Available-for-sale securities

68,065

663,330

–

731,395

68,065

1,507,765

4,261

1,580,091

–

–

11

11

–

–

11

11

Financial assets

Financial liabilities Other liabilities

31 December 2012

Financial assets

Financial liabilities Other liabilities

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Bulgarian Deposit Insurance Fund Annual Report for 2013

The table below summarises interest risk. It includes BDIF’s financial instruments presented at carrying amount, categorised by the earlier of a contractual interest change or maturity dates.

31 December 2013

up to 1 1-3 3-6 6-12 over 1 month months months months year BGN’000 BGN’000 BGN’000 BGN’000 BGN’000

interestfree BGN’000

Total BGN’000

Financial assets Cash and cash equivalents Available-for-sale securities

1,047,496

–

–

–

–

1,699

1,049,195

68,529

141,460

90,029

41,288

445,956

–

787,262

1,116,025

141,460

90,029

41,288

445,956

1,699

1,836,457

10

–

–

–

–

–

10

10

–

–

–

–

–

10

up to 1 1-3 3-6 6-12 over 1 month months months months year BGN’000 BGN’000 BGN’000 BGN’000 BGN’000

interestfree BGN’000

Total BGN’000

Financial liabilities Other liabilities

31 December 2012

Financial assets Cash and cash equivalents

844,435

–

–

–

–

4,261

848,696

Available-for-sale securities

215,739

30,421

–

21,425

463,810

–

731,395

1,060,174

30,421

–

21,425

463,810

4,261

1,580,091

11

–

–

–

–

–

11

11

–

–

–

–

–

11

Financial liabilities Other liabilities

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Sensitivity to interest risk The table below demonstrates BDIF’s sensitivity to possible changes in interest rates based on the structure of assets and liabilities at the end of the reporting period and with the assumption that the influence of all other variables is ignored.

Since BDIF has mainly financial instruments with fixed yields — debt securities and term deposits, while deposits are with original maturity of up to 7 days, the change in interest rates would affect mainly the yield of securities classified as available-for-sale, i.e. the statement of operations and respectively, directly net assets. The effect of sensitivity to interest risk on net assets is calculated by revaluing discount and fixed-coupon interest rate securities as at the end of the reporting period as a result of a possible change in interest rates, with the assumption that this change would lead to a relevant change in the yield of these instruments.

Currency

Increase/(decrease) in percentage points 2013

Sensitivity of net assets 2013 BGN’000

BGN

+1

(5,091)

EUR

+1

(6,221)

USD

+1

(282)

BGN

-1

5,091

EUR

-1

6,221

USD

-1

282

Increase/(decrease) in percentage points 2012

Sensitivity of net assets 2012 BGN’000

BGN

+1

(5,875)

EUR

+1

(4,520)

USD

+1

(507)

BGN

-1

5,875

EUR

-1

4,520

USD

-1

507

Currency

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Credit risk Credit risk is mainly the risk that BDIF might be unable to collect its receivables within the ordinary envisaged terms. The management of BDIF purposefully aims at distributing the credit risk within the frames of existing legal opportunities for investment of accumulated funds: part of the investments is in government securities and another part — in deposit accounts with the Bulgarian National Bank.

The ratio of investments in government securities and in deposit accounts with BNB, recognised in the structure of assets in the statement of financial position as at 31 December is, as follows:

31 December 2013

31 December 2012

Cash and cash equivalents

57%

54%

Available-for-sale government securities

43%

46%

The credit risk stemming from concentration in Bulgarian government securities, classified as available-for-sale, is assessed as minimum and manageable, as far as these are government securities issued and guaranteed by the Bulgarian state, which serves regularly its debt liabilities. The credit rating of an issuer is an assessment of its ability to meet the obligations upon maturity and is prepared by a specialised rating agency based on a profound financial analysis. The table below displays the credit rating of Bulgaria’s long-term obligations, as defined by two internationally recognised rating agencies.

31 December 2013

Standard & Poor’s Moody’s

31 December 2012

Standard & Poor’s Moody’s

In foreign currency

In local currency

Rating

Outlook

Rating

Outlook

BBB

Negative

BBB

Negative

Baa2

Stable

Baa2

In foreign currency

In local currency

Rating

Outlook

Rating

Outlook

BBB

Stable

BBB

Stable

Baa2

Stable

Baa2

BDIF’s management monitors and assesses the exposure to credit risk on a regular basis.

Liquidity risk Liquidity risk is the adverse situation where BDIF encounters difficulty in meeting unconditionally all its obligations within their maturity. The liquidity management policy of BDIF is conservative, maintaining a constant optimal liquid cash reserve to secure a good capability for funding its activities. In

81

Bulgarian Deposit Insurance Fund Annual Report for 2013

addition, according to the Law on Bank Deposit Guarantee, BDIF has the right to request an advance payment of the annual fees from guaranteed banks, an increase of the annual premium contribution and use of loans (Article 18 of the Law on Bank Deposit Guarantee).

The table below includes BDIF’s financial instruments classified by their residual term to maturity on the basis of undiscounted contractual cash flows.

Maturity analysis 31 December 2013

up to 1 month BGN’000

1-3 months BGN’000

3-12 months BGN’000

1-5 years BGN’000

over 5 years BGN’000

Total BGN’000

1,049,195

–

–

–

–

1,049,195

15,288

143,304

496,387

199,695

11,627

866,301

1,064,483

143,304

496,387

199,695

11,627

1,915,496

10

–

–

–

–

10

10

–

–

–

–

10

up to 1 month BGN’000

1-3 months BGN’000

3-12 months BGN’000

1-5 years BGN’000

over 5 years BGN’000

Total BGN’000

848,696

–

–

–

–

848,696

221,010

34,595

33,071

614,645

61,936

965,257

1,069,706

34,595

33,071

614,645

61,936

1,813,953

11

–

–

–

–

11

11

–

–

–

–

11

Financial assets Cash and cash equivalents Available-for-sale securities

Financial liabilities Other liabilities

31 December 2012

Financial assets Cash and cash equivalents Receivables from banks Available-for-sale securities

Financial liabilities Other liabilities

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Bulgarian Deposit Insurance Fund Annual Report for 2013

Fair values Fair value is generally the amount for which an asset could be exchanged, or a liability settled in an armâ&#x20AC;&#x2122;s length transaction between independent, willing and knowledgeable parties. The policy of BDIF is to disclose in its financial statements the fair value of these financial assets and liabilities, mostly those for which market quotations are available. The fair value of financial instruments traded in active markets is based on the prices quoted at the end of the reporting period. The quoted market prices are the current bid prices (purchase price).

The fair value of financial instruments, which are not traded in active markets, is determined through valuation methods based on various valuation techniques and management assumptions made in accordance with the market circumstances as at the end of the reporting period.

Financial assets and liabilities are either current in their nature (deposits placed, receivables from banks, other current liabilities) and their fair value approximates their carrying amount, or they are presented in the statement of financial position at market value (investments in securities).

The management of BDIF believes that the estimates of financial assets and liabilities presented in the statement of financial position are as reliable, adequate and trustworthy as possible for financial reporting purposes under the existing circumstances.

13. RELATIONS AND TRANSACTIONS WITH GOVERNMENT INSTITUTIONS, AUTHORITIES AND ENTERPRISES The Ministry of Finance and the Bulgarian National Bank are the government institutions with which BDIF has regular relations in accordance with its special status and functions, as well as in line with the legal requirements.

BDIF is governed by a Management Board designated in accordance with the Law on Bank Deposit Guarantee (Note 1).

The funds accumulated by BDIF from bank contributions in accordance with the legal requirements are invested in securities issued or guaranteed by the Bulgarian state and in short-term deposits with the Bulgarian National Bank (Notes 7 and 8). Securities in which BDIF invests are acquired both in the primary market by participating in auctions organised and carried out by the Bulgarian National Bank and in the secondary market.

83

Bulgarian Deposit Insurance Fund 27 Vladayska Street, 1606 Sofia, Bulgaria T +359 2 953 1217, +359 700 144 03 F +359 2 952 1100 Đ&#x2022; contact@dif.bg www.dif.bg