On 10 July 2020, Bulgaria joined the European Exchange Rate Mechanism II (ERM II) together with Croatia.
This comes more than two years after Bulgaria expressed its firm intention to join the ERM II and closely cooperate with the European Central Bank (ECB) under the Single Supervisory Mechanism (SSM), which resulted in a detailed roadmap, comprehensive asset quality review and stress tests of more than six banks last summer.
The exchange rate band for the Bulgarian lev within ERM II is set at EUR 1 equal to BGN 1.95583 (with the standard fluctuation band of plus or minus 15%) to be observed pursuant to the parameter under the Resolution of the European Council on the establishment of an exchange-rate mechanism in the third stage of economic and monetary union. Furthermore, Bulgaria has provided a unilateral commitment for maintaining its currency board, which was in place since 1997 until the adoption of the Euro.
In its application letter for the entry into ERM II, Bulgaria made several post-entry commitments, which include:
- Non-banking financial sector resilience enhancement, especially ensuring compliance with the quantitative and qualitative requirements under Solvency II framework;
- Implementation of the 2019 Law on Public Enterprises and strengthening the role of the Agency for Public Enterprises and Control;
- Strengthening of the Bulgarian insolvency framework through legislative amendments and reform of the judicial infrastructure of the insolvency courts;
- Strengthening of the AML framework and enhancing the capacity and capability of supervisory authorities.
On the same day Bulgaria joined ERM II, the ECB Governing Council adopted a decision to establish close cooperation with the Bulgarian National Bank. As a result, from 1 October 2020 the ECB will directly supervise Bulgaria's "significant institutions" and will provide oversight of less significant institutions, in line with Regulation (EU) No 1024/2013.
Prior to this supervision taking place, the ECB will carry out an assessment to determine which Bulgarian banks fulfil the criteria to be classified as significant institutions.
According to Art. 140 of the Treaty on the Functioning of the EU, Bulgaria must participate in ERM II for at least two years, but this practice for some countries, such as the Baltic nations, has been extended for up to ten years.
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