Opinion of the European Central Bank of 18 September 2023 on the integration of Българска народна банка (Bulgarian National Bank) into the Eurosystem (CON/2023/27)

OPINION OF THE EUROPEAN CENTRAL BANK of 18 September 2023 on the integration of Българска народна банка (Bulgarian National Bank) into the Eurosystem (CON/2023/27) Introduction and legal basis

On 28 August 2023 the European Central Bank (ECB) received a request from Българска народна банка (Bulgarian National Bank (BNB)), acting on behalf of the Bulgarian Minister for Finance, for an opinion on a draft law recasting and replacing the Law on BNB (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of Article 2(1) of Council Decision 98/415/EC , as the draft law relates to BNB. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft

1.1 As explained in the consultation letter accompanying the draft law, the draft law aims to ensure the legal integration of BNB into the Eurosystem upon the introduction of the euro in Bulgaria. The draft law adopts the approach of not reproducing in national law directly applicable provisions of Union law but, where appropriate, it includes references to such provisions. 1.2 The draft law fully replaces and repeals the currently applicable Law on BNB. The draft law is divided into 16 chapters, covering (1) general provisions, (2) independence, (3) accountability, (4) core capital and reserves, (5) structure and governance, (6) currency, banknotes and coins, (7) monetary policy, (8) management of BNB reserve assets, (9) management of foreign assets, (10) relations with the State, (11) relations with banks, (12) relations with other persons, (13) statistical activity, (14) financial reporting and implementation of the budget of BNB, (15) other provisions, and (16) administrative criminal liability. The draft law also contains supplementary, transitional and final provisions. 1.3 The draft law would enter into force on the date stipulated in the Council Decision on the adoption by the Republic of Bulgaria of the euro, adopted in accordance with Article 140(2) of the Treaty, and in the Council Regulation adopted in accordance with Article 140(3) of the Treaty. The regulations on the implementation of the repealed Law on BNB would remain in force insofar as they are not contrary to the draft law .

Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 2 See paragraphs 4 and 5 of the transitional and final provisions of the draft law.

2. General observations

2.1 The ECB welcomes the draft law. The draft law’s objective is to facilitate a smooth changeover to the euro in Bulgaria and timely implementation of the necessary measures in connection therewith. 2.2 The ECB welcomes the draft law’s objective to achieve the required level of legal convergence as set out in the recommendations for Bulgaria contained in the ECB Convergence Report 2022 , which reports on the progress made by Member States with a derogation, including Bulgaria, in fulfilling their obligations regarding the achievement of economic and monetary union. Part of this reporting covers, inter alia, the compatibility of Bulgarian legislation, in particular, the Law on BNB and the Law on counter-corruption, with the Treaties and the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘Statute of the ESCB’), as required by Article 131 of the Treaty. 2.3 The ECB welcomes that the draft law seeks to avoid reproducing directly applicable provisions of Union law but that, where appropriate, it includes references to such provisions. In this respect, it should be noted that the reproduction in a national provision of a Union provision that is directly applicable in the legal order of the Member State may create uncertainty both as to the legal nature and origin of the applicable provisions and as to the date of their entry into force. This would not align with the principle of uniform application and interpretation of Union law throughout the Union . 2.4 Furthermore, given the hybrid status of the national central banks (NCBs) in the highly integrated structure which the authors of the Treaties envisaged for the European System of Central Banks (ESCB) and the Eurosystem , the reproduction in a national law of a provision of the Treaties and the Statute of the ESCB that is directly applicable in the legal order of the Member State may create uncertainty as to the acts over which the Union courts have jurisdiction or as to whether the NCB is accountable to its national parliament. This would not align with the singleness of monetary policy . 2.5 Moreover, if a national provision uses wording different from the relevant Union provision for the introduction of the euro, it would create regulatory content of its own, which would not be in line with the Union’s exclusive competence in matters of monetary policy for the Member States whose currency is the euro . The concept of monetary policy is not limited to its operational implementation, which, under Article 127(2), first indent of the Treaty, is one of the basic tasks of the Eurosystem , but also entails a regulatory dimension intended to guarantee the status of the euro as the single

3 See ECB Convergence Report 2022, available on the ECB’s website at www.ecb.europa.eu.

4 Judgment of the Court of Justice of 2 February 1977, Amsterdam Bulb, C-50/76, EU:C:1977:13, paragraphs 5 to 8; Judgment of the Court of Justice of 10 October 1973, Variola, C-34/73, EU:C:1973:101, paragraphs 9 to 11; Judgment of the Court of Justice of 7 February 1973, Commission v Italy, C-39/72, EU:C:1973:13, paragraphs 16 and 17. See also paragraph 2.3. of Opinion CON/2022/15, paragraph 2.2 of Opinion CON/2007/43, paragraph 2.1 of Opinion CON/2007/1, paragraph 2.4 of Opinion CON/2006/29, paragraph 2.1 of Opinion CON/2006/10 and paragraph 12 of Opinion CON/2005/21. All ECB Opinions are available on EUR-Lex.

5 Judgment of the Court of Justice of 13 September 2022, Banka Slovenije, C-45/21, EU:C:2022:670, paragraph 52; Judgment of the Court of Justice of 17 December 2020, Commission v Slovenia, C‑316/19, EU:C:2020:1030, paragraph 83. currency . As a result, Member States may not adopt provisions in that area without being empowered to do so by Union law . 2.6 Although the draft law generally does not reproduce directly applicable provisions of Union law, some provisions of the draft law incorporate some elements of directly applicable provisions of Union law into Bulgarian law for the sake of coherence and in order to make them comprehensible to the persons to whom they apply . In this regard the ECB welcomes that the reproduction of elements of directly applicable provisions of Union law is done precisely in the draft law, either by incorporation or reference, without modifying their wording . The draft law clarifies in particular that the relevant provisions are either ‘in accordance with’ or ‘in compliance with’ the relevant provisions of Union law, where the latter are merely reproduced or referenced to put the draft law in the larger context of the highly integrated structure BNB operates in, or ‘without prejudice to’ the relevant provisions of Union law, where BNB acts as a national authority, exercising residual competences that go beyond those exercised within the ESCB and the Eurosystem.

3. Specific observations

3.1 Financial reporting 3.1.1 Article 9(1) of the draft law provides that, in order to cover financial risks, BNB is to allocate provisions in an amount determined by the BNB Governing Council, which is to be an item of the accounting expenditure and an adjustment of the assets on the balance sheet. While the scope of Article 9(1) of the draft law is in line with Article 8 of Guideline (EU) 2016/2249 of the European Central Bank (ECB/2016/34) , the reference to an adjustment of the assets on the balance sheet could be misunderstood because a provision is generally accepted to be a liability of uncertain timing or amount. The ECB, therefore, recommends that this part of Article 9(1) is replaced by a clarification that BNB allocates provisions, in an amount determined by the BNB Governing Council, that are an item of the accounting expenditure and take into account a number of factors, including the level of risk-bearing assets on the balance sheet. 3.1.2 The first sentence of Article 57(1) of the draft law provides that any unrealised gains of BNB arising from variations in the valuation of BNB’s assets or liabilities in gold or expressed in gold terms, or in foreign currencies, as a result of a fluctuation of the price or of the rates of exchange of gold or of a foreign currency against the euro, is to be credited to a special reserve account. The ECB notes that whereas Guideline (EU) 2016/2249 (ECB/2016/34) envisages that NCBs also revalue their euro-

9 Judgment of the Court of Justice of 26 January 2021, Hessischer Rundfunk, C-422/19 and C-423/19, EU:C:2021:63, paragraph 38 and 39.

10 Judgment of the Court of Justice of 20 April 2023, Brink’s Lithuania, C-772/21, EU:C:2023:305, paragraphs 56 and 57.

11 See paragraph 2.4 of Opinion CON/2022/15 and paragraph 12 of Opinion CON/2005/21 with reference to Judgment of the Court of Justice of 28 March 1985, Commission v Italian Republic, C-272/83, EU:C:1985:147. See also paragraph 2.2 of Opinion CON/2006/10.

12 See paragraph 2.4 of Opinion CON/2022/15 and paragraph 2.2 (footnote 6) of Opinion CON/2007/43.

13 See Article 14.4 of the Statute of the ESCB.

14 Guideline (EU) 2016/2249 of the European Central Bank of 3 November 2016 on the legal framework for accounting and financial reporting in the European System of Central Banks (ECB/2016/34) (OJ L 347, 20.12.2016, p. 37). denominated holdings of non-monetary policy related marketable securities, other than those held to maturity , Article 57(1) refers only to the valuation of assets or liabilities in gold or foreign currency. 3.1.3 The second sentence of Article 57(1) of the draft law provides that in addition to the purposes referred to in Article 57(2) of the draft law, whereby losses arising from the variations referred to in Article 57(1) must be offset by funds in the special reserve account, the amounts in this account may also be used to cover other losses of BNB. It is not clear whether these provisions are compliant with the ‘no-netting’ principle for the revaluation of gains and losses as defined in Guideline (EU) 2016/2249 (ECB/2016/34). In this context, Article 15(1), point (e), of Guideline (EU) 2016/2249 (ECB/2016/34) clarifies that there is to be no netting of unrealised losses in any one security, or in any currency or in gold holdings, against unrealised gains in other securities or currencies or gold. 3.1.4 In order to achieve consistency with the ECB’s legal framework for accounting and financial reporting in the ESCB, the ECB suggests clarifying that the scope of Article 57 of the draft law is not limited to assets and liabilities denominated in foreign currencies, but also includes revaluations of euro denominated items as required under the ECB’s legal framework. Moreover, the ECB recommends that the last sentence of Article 57(1) and the entire Article 57(2) should be either removed or clarified. 3.2 Currency, banknotes and coins 3.2.1 Article 26(1) of the draft law provides that the currency of Bulgaria is to be the euro, that the currency unit is to be one euro, and that one euro is to be divided into one hundred cent. This provision reproduces Article 2 of Council Regulation (EC) No 974/98 , as a consequence of which, upon Bulgaria’s adoption of the euro, with effect from the date on which the abrogation of Bulgaria’s derogation under Article 140(2), first subparagraph, of the Treaty enters into effect, the currency of Bulgaria will be the euro. Article 2 of Regulation (EC) No 974/98 constitutes a provision of directly applicable Union law and an explicit reference should be made to it if its partial reproduction is maintained in the draft law for the sake of coherence. 3.2.2 Article 32(1) and (2) and Article 33(1) and (2) of the draft law concern, inter alia, the separation of euro banknotes and coins unfit for the cash cycle. These provisions partially reproduce Article 6(1) of Council Regulation (EC) No 1338/2001 . The draft law should state that the obligations set out in these provisions of the draft law will be carried out in accordance with the applicable provisions of Union law, notably Decision ECB/2010/14 of the European Central Bank . 3.2.3 Article 33(3) of the draft law empowers BNB to determine the requirements for the processing of euro banknotes by banks, other specified financial institutions and economic operators. This provision partially reproduces Article 10 of Decision ECB/2010/14. The draft law should clarify that Article 33(3)

15 In addition, Article 9(5) of Guideline (EU) 2016/2249 (ECB/2016/34) provides that marketable securities held for monetary policy purposes are to be valued either at market price or amortised cost depending on monetary policy considerations.

16 Council Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro (OJ L 139, 11.5.1998, p. 1).

17 Council Regulation (EC) No 1338/2001 of 28 June 2001 laying down measures necessary for the protection of the euro against counterfeiting (OJ L 181, 4.7.2001, p. 6).

18 Decision ECB/2010/14 of the European Central Bank of 16 September 2010 on the authenticity and fitness checking and recirculation of euro banknotes (OJ L 267, 9.10.2010, p. 1). will be applied in accordance with not only the applicable provisions of Union law but, in particular, Decision ECB/2010/14. This opinion will be published on EUR-Lex. Done at Frankfurt am Main, 18 September 2023. [signed] The President of the ECB Christine LAGARDE