Financial Sector Integrity Project

DEVELOPMENT CHALLENGES Through its comprehensive Financial Sector Development technical assistance program, USAID promoted the emergence of a stable private financial sector that attracts investment, mobilizes savings, and allocates resources to productive uses. However, the strong growth in financial sector activities presents new risks and challenges particularly for the regulatory institutions, which are still in the early stages of their development. The recently established Financial Supervision Commission (FSC) has few trained staff and policies and procedures based on international standards and has not yet established credibility with the financial industry. Money laundering becomes a growing concern as there is more financial sector activity and a proliferation of non-bank financial institutions. The key challenge for the Bulgarian financial system in the coming period will be to successfully make the transition from post-crisis caution and consolidation to renewed emphasis on development and carefully managed expansion, without incurring undue levels of risk and new instability.

USAID INVOLVEMENT USAID assistance to the financial sector started in late 1997 when Bulgaria was emerging from an acute and broad banking crisis. The overarching cause of the crisis was that there was little or no supervision of the individual banks and the banking system. An inevitable result of the crisis was a complete loss of confidence in the banking system and its institutions. In support of the IMF and World Bank-led structural reforms, USAID assisted in preparing the banking sector restructuring strategy, which was comprised of three elements: Bank Privatization, Enhanced Supervision, and Commercial Banker Training, and quickly mobilized resources to provide badly needed technical assistance in the three areas. Significant progress has been made over the last 6 years. The legal/regulatory framework is largely in place and implementation and enforcement is improving. Private commercial banks dominate the financial sector. A strong bank supervision authority is in place in the National Bank of Bulgaria and an effective deposit insurance system has been established. The infrastructure for capital markets has also been developed. Lending to the private sector is steadily growing and the turnover on the stock exchange is improving. Building on the successful banking and capital markets programs already implemented by USAID, the current project presents a more comprehensive and integrated approach to financial sector assistance, in line with progress made in USAID envisions completing its assistance to the financial sector in Bulgaria, under its bilateral program.

GOAL The primary goal of USAID’s Financial Sector Integrity Project is to further strengthen the Bulgarian financial sector institutions in managing the new risks associated with a very competitive economic environment.

PROJECT DESCRIPTION This project integrates all segments of the financial sector and utilizes demand driven approach to meet the needs of the various counterparts. Assistance is incorporated within three major areas of work:

•Improved Regulation of the Financial Sector. USAID works with Financial Regulatory Agencies to improve their oversight of respective financial institutions in several areas:
- Develop a more integrated supervisory approach wherein regulatory agencies work together to supervise multi-faceted enterprises such as conglomerates.
- Incorporate a more risk based supervision methodology.
- Provide expert advisors to work with regulatory agencies in such areas as financial conglomerates, risk based deposit insurance premiums, and new financial market instruments.

• Anti-Money Laundering (AML). USAID works primarily with Financial Regulatory Agencies to increase their AML capabilities in detecting and reporting of suspicious transaction activity at banks and non-bank financial institutions.

• Transparency of the Financial System. USAID works toward increasing the transparency of the financial system through educational and outreach opportunities in several activity areas:
- Build Policymaker and Legislature awareness with regard to complicated financial matters.
- Educating the Public of new products available in the market
- Promote consumer protection