ANALYSIS - Relaxed Reserves Requirements To Boost Confidence Among Bulgarian Banks, No Lowering Action Needed

The Bulgarian National Bank (BNB) on Tuesday said it would recognise 50% of the cash banks hold in their vaults as reserve assets, aiming to increase the liquidity of the banking system amid the global financial crisis and tame the volatility of the interbank money market. The BNB also said it will ease the access of commercial banks to their reserves held with it.

The relaxation would release 350 million levs ($225 million/180 million euro) to 400 million levs, local media reported.

“This is a good step because this is the only way to counteract the rise in the interbank money rates,” Stefan Angelov, an analyst with Varna-based brokerage Varchev Finance, told SeeNews.

Bulgaria's Lev Overnight Index Average, LEONIA, has been gradually rising this month, peaking at 6.37% on October 17. It started falling this week after the central bank relaxed its reserves requirements, reaching 5.40% on Tuesday and Friday.

“There was lack of confidence among banks and they preferred not to lend to each other or when they did it was at a high risk premium,” Angelov said.

He added that the BNB's decision is good for the stability of the banking system also because it does not lower the central bank's reserves requirements to release cash to banks.

Commercial banks in Bulgaria hold 12% of the deposits they have attracted as minimum reserves with the central bank.

“The Bulgarian government and the central bank so far have made statements and have taken effficient measures to raise the confidence in the banking system,” said Elitza Kavrakova, head of Financial Institutions and Sovereigns for Russia, CIS, SEE and Turkey at Austrian banking group Raiffeisen Zentralbank (RZB).

Bulgarian government and BNB officials have repeatedly said that the country's banking system is well capitalized and is not affected directly by the global financial turmoil. The government has said it would not hesitate to protect the savings of depositors in local banks jointly with the BNB, if and when needed.

Analysts said that no further actions from the central bank is currently needed.

“I personally don’t see serious problems at the moment, which would justify a cut in minimum reservest," Kavrakova told SeeNews.

She added that cutting the minimum reserves requirements “would mean that the Bulgarian interbank market has a serious problem.”

The BNB move will lead to drop in money market rates but it will have no impact on interest rates of loans extended to non-bank clients, Pari daily quoted Eurobank EFG Bulgaria executive director Assen Yagodin as saying.

According to Angelov the move will also have no direct impact on the bank stocks trading on the Bulgarian Stock Exchange (BSE).

“There will be no direct impact because there is one main risk, the macroeconomic one, which is influencing all stocks,” he said.

Only four of the the 24 domestically-registered banks are listed on local bourse. Most local lenders are owned by international banks. There are also branches of six foreign lenders operating in the country.

(1 euro = 1.95583 Bulgarian levs)

(SeeNews reporter Iva Doneva contributed to this story)