The policy consensus that has emerged from this experience has a more cautious view of the benefits of financial integration, a greater awareness of the damage caused by creating incentives that distort the composition of flows and a greater appreciation of the importance of having in place a strong set of institutions, in the financial system in particular. It has also fostered a greater skepticism within governments of their ability to sustain and adjust a set of limited controls on capital flows, once an economy has passed a certain point of relative openness. Money tends to move around these controls with progressive ease, and it becomes more difficult over time to counteract this force with acceptable costs to other objectives. For this basic reason, many emerging market governments that were early proponents of selective controls have moved to eliminate them. Faced with the challenges of managing policy in an increasingly integrated world economy, the dominant instinct of officials is often to try to shield the economy from volatility. But the crises of the 1990s helped demonstrate why this approach can be both futile and counterproductive. As economies become more open to capital flows, policies designed to insulate an economy from external shocks, whether they be fixed exchange rate regimes or selective capital controls and restrictions on international transactions, rarely offer durable stability, and they bring additional risks. These risks come in the form of additional distortions that might undermine future growth or magnify vulnerability to future financial volatility.
This clearly indicates restored confidence in the system. Besides, the banking system is about to end the year with excellent capital adequacy and liquidity indicators. I say the banking system, meaning all banks, excluding KTB and CB Victoria. As at September, the total capital adequacy ratio stood at 22.16%, and only Tier 1 capital ratio was 19.91% (just to remind you that the EU provisions in the New Basel Capital Accord, also known as “Basel III”, require 8% total capital adequacy and 6% tier 1 capital ratio, respectively). The liquid assets-to-liabilities ratio in the banking system as at October reached 29.75%. In 2014 the share of non-performing exposures past-due for more than 90 days has continued to stabilise. At the end of October this year, at system level, their book value was 10.62% of the system’s loan portfolio book value (i.e. practically the same as at the end of 2013 when their share was 10.28%). The balance-sheet share of non-performing exposures reflects the already provisioned risk through the impairments already made. The provisioning level itself is high, with a total of BGN 5–6 billion provisions in the form of impairments allocated by the banking sector under IFRS until October. The banking system continues to generate profit, which is a source of additional capitalisation and is thus a reserve for maintaining stability. We expect the sector to end 2014 at a positive financial result of circa BGN 700 million (i.e. above last year’s result).