After in July the Eurogroup gave the green light for Bulgaria to start its way into the eurozone, it was time for the Bulgarian government to prepare its homework. In August, the Bulgarian government adopted a detailed action plan for joining ERM II and the Banking Union and there were some changes¹ to the Bulgarian National Bank Act that also seem to lead in this general direction.

The first thing that stands out is that the action plan actually details each of the seven points in the formal letter of commitment, sent by the Bulgarian government before the already mentioned Eurogroup meeting in July. Against each of these seven points in the action plan we find sub-items with specific tasks, expected results, deadlines and responsible agencies – just what any good action plan should look like.

The other thing to note is that most specific tasks are related to non-banking supervision – about one-third of the action plan is in fact measures to improve the oversight of the non-banking financial sector, despite the fact that the action plan is supposed prepare the country for the European Banking Union and ERM II (rather than some hypothetical non-banking union). This clearly points to existing concerns among euro area members in terms of the practices and supervision of this segment of the Bulgarian financial sector.

Here are the more important moments in the plan.

Preparation for the Banking Union: The Measures in Two Directions

Legislative measures: Changes will be made to several laws (the Law on the Bulgarian National Bank, the Credit Institutions Act, the Act on the Recovering and Restructuring of Credit Institutions and Investment Intermediaries) and the regulatory framework, including the introduction of instruments for the so-called macroprudential supervision². These changes are also intended to give the ECB the appropriate powers after joining the Banking Union as well as the future participation of Bulgaria and the Bulgarian banks in the Single Resolution Fund. This fund is part of the second pillar of the Banking Union, which concerns precisely the restructuring of problematic banks.³

New asset valuation and stress tests of banks: Until the publication of the Action Plan, it was unclear whether such tests and valuations would be carried out once again, since the Bulgarian banking system had relatively recently been subjected to such a review (in the spring 2016). Now we understand that it will have to be done again – according to the plan, the whole process should take place between September-October 2018 and June-July 2019.

Non-Banking Supervision

Here, the measures are quite a few, and above all concern changes in the regulatory framework for oversight of the sector. Some of the measures address concerns about the valuation of pension fund assets and the assets of insurance companies, including new valuation methodologies for certain types of assets (including real estate). Others focus on auditors and the annual audit of these companies, and others still – on risk-based supervision of pension funds and insurers.

Interestingly, another major concern regarding the assets of non-bank financial institutions, namely exposures to related parties⁴, is not addressed in the Action Plan. While there are probably reasons behind this decision, the very fact that other important recommendations from the Commission’s reports are answered with concrete actions, puts this omission into the spotlight.

Insolvency Framework and Management of State-Owned Enterprises

Here the approach of the Bulgarian administration seems similar, as it foresees a project under the EU Structural Reform Support Program (SRSP) for both topics – the first one is already approved and underway, while the second one has been submitted for approval. The difference is that in regard to the insolvency issue, activities will be carried out by a working group of the administration itself, while the second will be carried out by the OECD, with a concept already in place.

The extent to which these projects will be able to bring about real changes, however, is not clear, especially regarding the management of state-owned enterprises. The outcome of the second project is set as an array of proposed and adopted legislative changes.

However, it is debatable whether the major problems in the management of state-owned companies (decapitalization, irresponsible governance, corruption and nepotism, political appointments of incompetent governors, flawed public procurement practices, etc.) can be addressed by legislative changes.

Money Laundering

Once again, legislative changes are envisaged in this direction. Some of them are aimed at clearing up issues with the transposal of a 2015 EU directive and the rest – at transposing a new directive.

The inclusion of these measures, however, seems to be nothing more than a “filling”, given that Bulgaria has an obligation to transpose the new directive anyway. Resolving the issues with the transposal of the old directive should also not be a matter of goodwill of the Bulgarian government.

Among the things that have clearly been omitted from the action plan are measures in the judicial system and the fight against corruption. To be fair, these topics were also not included in the letter sent by the Bulgarian authorities to the Eurogroup.

However, the Eurogroup’s official announcement after the July meeting this year explicitly mentions the Cooperation and Verification Mechanism. In particular, the Eurogroup communication concluded: “We call on the Bulgarian authorities to fully implement the reforms monitored by the Cooperation and Verification Mechanism in the field of judicial reform and the fight against corruption and organized crime in Bulgaria, in the light of their importance for stability and the integrity of the financial system”.

So far, the Bulgarian administration’s response to this issue has been to close its eyes and hope it will go away. However, given the insistence of part of the Eurogroup ministers to include this text in the press release, this strategy may not work.

Overall, the action plan measures, if implemented, will certainly result in positive changes, with the number and specificity of non-bank oversight activities being the most convincing and thus creating the most serious expectations. Given the above-mentioned shortcomings, and perhaps others that can be identified by the current members of the euro area, it is no wonder that this list will be expanded in the coming months.

The most important thing at this stage, however, is for the Bulgarian government to show that it is determined to make fundamental reforms to reach its ambitious euro zone membership target. This plan is certainly the first step in this direction, but it probably will not be the last one.