The World Bank Deposit Insurance Strengthening Project (P154219) REPORT NO.: RES34377 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF DEPOSIT INSURANCE STRENGTHENING PROJECT APPROVED ON MARCH 18, 2016 TO BULGARIAN DEPOSIT INSURANCE FUND FINANCE, COMPETITIVENESS AND INNOVATION EUROPE AND CENTRAL ASIA Regional Vice President: Cyril E Muller Country Director: Arup Banerji Senior Global Practice Director: Alfonso Garcia Mora Practice Manager/Manager: Marialisa Motta Task Team Leader: Alexander Pankov, Raquel Alejandra Letelier The World Bank Deposit Insurance Strengthening Project (P154219) ABBREVIATIONS AND ACRONYMS The World Bank Deposit Insurance Strengthening Project (P154219) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. BASIC DATA Product Information Project ID Financing Instrument P154219 Investment Project Financing Original EA Category Current EA Category Not Required (C) Not Required (C) Approval Date Current Closing Date 18-Mar-2016 31-Dec-2018 Organizations Borrower Responsible Agency Bulgarian Deposit Insurance Fund Bulgarian Deposit Insurance Fund Project Development Objective (PDO) Original PDO The Project Development Objective is to strengthen the financial and institutional capacity of the Bulgarian Deposit Insurance Fund(BDIF) so as to enable it to meet its deposit insurance and bank resolution obligations. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-85960 18-Mar-2016 01-Apr-2016 28-Jun-2016 31-Dec-2018 327.47 319.73 0 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Deposit Insurance Strengthening Project (P154219) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status 1. The project, financed by a EUR 300 million loan, was approved by the WB Board in March 2016, and declared effective in end-June 2016. The full amount of the loan has been disbursed to the Borrower (the Bulgarian Deposit Insurance Fund - BDIF): EUR 240 million based on compliance with 8 disbursement-linked indicators (DLIs), and EUR 60 million as an advance payment against the future achievement of the remaining 2 DLIs by the current project closing date (December 31, 2018). 2. Based on the above and on the last ISR (from August 2018), the project is currently rated as satisfactory. The project financial arrangements are adequate and there are no overdue or qualified opinion audits. B. Rationale for Restructuring 3. The two remaining DLIs, related to the distribution of the recoveries from the bankrupt KTB bank, will not be met by end-2018. The reason is that the distribution of the recoveries has been delayed by a pending decision of the Sofia court regarding 9 appeals from KTB creditors (other than the BDIF) on the distribution amounts attributed to them. The court decision is not expected to take place before mid-2019. Therefore, the achievement of these DLIs are currently out of the control of the Borrower. 4. The BDIF has -in addition to the WB loan- an outstanding loan with the Ministry of Finance (MoF) of Bulgaria, amounting to BGN 500 million (EUR 250 million) of principal. The maturity date of this loan is April 2020. 5. The Bulgarian Law on Bank Deposit Guarantee sets a minimum reserve ratio (defined as the ratio of BDIF reserves over total covered deposits in member banks) of 1% to be reached by 2024 (which is above the prescribed 0.8% minimum rate in the European Deposit Guarantee Schemes Directive). The BDIF has already reached the 1% level in end-2017, from a baseline of 0.75% at end-2015. The World Bank Deposit Insurance Strengthening Project (P154219) 6. One of the project development objective (PDO) indicators, related to the objective of strengthening the financial capacity of the BDIF, is the reserve ratio. For end-2016 and end-2017, the PDO indicator was set at 0.8% and 1% respectively (both met by the Borrower), while for end-2018 (the current project closing date), the PDO indicator was set at 1.5%. The value for this indicator was calculated during project preparation stage under the assumption that, by the current project closing date, recoveries from the bankrupt KTB bank would have been received, and the loan with the MoF would have been fully repaid. Given the pending decision of the Sofia court, this is no longer the case. II. DESCRIPTION OF PROPOSED CHANGES C. Extension of the Project Closing Date by 12 months 7. Considering that the achievement of the remaining two DLIs is out of the control of the Borrower and entirely within the discretion of the Sofia City Court, the Borrower (in agreement with the WB team) has officially requested an extension of the project closing date by 12 months (i.e. to December 31, 2019), to allow time for the reception of the funds from the KTB recoveries. D. Revision of one PDO Indicator 8. The Borrower has also requested a reduction of the required reserve ratio for the remaining of the project implementation period (up to the revised project closing date) from 1.5% to 1%, which is the level prescribed by the Law on Bank Deposit Guarantee. E. Revision of the Intermediate Results Indicator Related to the Recoveries from Bankrupt Banks 9. The project DLIs are used as intermediate results indicators. The indicator related to the recoveries from bankrupt banks has currently an end target date equivalent to the current project closing date (December 31, 2018). Therefore, a modification of the indicator’s end target date to the revised project closing date is proposed. III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Loan Closing Date(s) ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Components and Cost ✔ Cancellations Proposed ✔ The World Bank Deposit Insurance Strengthening Project (P154219) Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-85960 Effective 31-Dec-2018 31-Dec-2019 30-Apr-2020 . The World Bank Deposit Insurance Strengthening Project (P154219) . Results framework COUNTRY: Bulgaria Deposit Insurance Strengthening Project Project Development Objectives(s) The Project Development Objective is to strengthen the financial and institutional capacity of the Bulgarian Deposit Insurance Fund(BDIF) so as to enable it to meet its deposit insurance and bank resolution obligations. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 Strengthen the financial capacity of the BDIF (Action: This Objective is New) BDIF reserves reach the equivalent of 1 percent of covered deposits, in 0.75 0.80 1.00 1.00 1.00 the absence of bank failures (Percentage) Action: This indicator has been Revised Strengthen the institutional capacity of the BDIF (Action: This Objective is New) BDIF performing its legally mandated technical functions, including in any future bank failures No Yes Yes Yes in which its resources are utilized (Yes/No) PDO Table SPACE The World Bank Deposit Insurance Strengthening Project (P154219) Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 Increase the Borrower’s reserves through premium collection from banks (Action: This Component is New) Risk-based premium collection (Yes/No) Yes Yes Yes Yes Premium collected from banks 0.00 150,000,000.00 300,000,000.00 220,000,000.00 (Amount(USD)) Make progress in asset recovery process from bankrupt banks (Action: This Component is New) Recoveries from bankrupt banks 0.00 236,330,000.00 (Amount(USD)) Action: This indicator has been Revised Strengthen the Borrower’s funding structure (Action: This Component is New) Long-term loan or back-stop funding 0.00 300,000,000.00 300,000,000.00 300,000,000.00 facility mobilized by BDIF (Amount(USD)) Improve the Borrower’s ability to anticipate and respond to problems in banking sector (Action: This Component is New) Updated BNB-BDIF MOU in place No Yes Yes Yes (Yes/No) Results of Asset Quality Review shared No Yes Yes Yes with BDIF (Yes/No) Improve the Borrower’s ability to undertake depositor payout and bank resolution functions (Action: This Component is New) Public awareness strategy in place No No Yes Yes (Yes/No) BDIF Contingency Plan in place (Yes/No) No Yes Yes Yes IO Table SPACE The World Bank Deposit Insurance Strengthening Project (P154219) The World Bank Deposit Insurance Strengthening Project (P154219)