Over the past two weeks, two of Bulgaria’s largest financial institutions have experienced bank runs. This triggered memories of the banking crisis in 1996-97 when one-third of the banks in this emerging economy went bankrupt and depositors lost a large share of their savings. Yet the panic that caused worried customers to form long lines in front of bank branches around the country this time around was astonishing because Bulgaria’s banking sector is one of the most sound and well capitalized in central and eastern Europe.
The financial crisis of the 1990s and the resulting hyperinflation were ultimately contained by introducing a currency board arrangement that pegged the Bulgarian lev to the German mark and later to the euro. Regulation was tightened, bank supervision was improved and expanded, and viable banks were sold to strategic investors from abroad. More than 70 percent of the banks became foreign-owned. The financial stability that these measures brought was further strengthened by the accession of Bulgaria to the EU in 2007.
The subsequent global financial crisis and European debt crisis led to a severe decline in crediting activities and an increase in non-performing loans. But the banking sector in the country weathered these adverse conditions relatively well. For these reasons, the recent sudden bank runs caught the general public and regulatory authorities by surprise.
The CCB affair
The first bank to fall victim to the panic was the Corporate Commercial Bank (CCB), which is the fourth-largest and the fastest-growing lender in Bulgaria.
Over the past few years CCB has been able to attract the deposits of the majority of state-owned enterprises in the country. This allowed it to get involved in some huge deals, such as the privatization of the former state tobacco monopoly, Bulgartabac. The majority shareholder of CCB, Tzvetan Vassilev, emerged as one of the country’s most prominent businessmen. He sponsored sports teams and even financed a new political party that won more than 10 percent of the votes for the European parliament in May.
The trouble for CCB began last year when the Bulgarian parliament implemented a new rule compelling state-owned enterprises to hold no more than 25 percent of their deposits in a single bank. There were also some indications that the bank was under-reporting its share of non-performing loans and was violating some provisions. The lack of any action by the central bank was seen as a sign that CCB enjoys political protection.
Stand well back
A few months ago Vassilev had a major falling out with his business partner, Delyan Peevski, a controversial media magnate, former magistrate and current member of parliament; who is said to have powerful connections in political and judicial circles. The clash became public two weeks ago when the two men traded accusations of trying to kill each other. Apparently Peevski prevailed because Vassilev fled to Vienna while the police arrested three men accused of planning the assassination of Peevski and searched the offices of CCB.
It was further revealed that Peevski, who had been a major client of CCB, transferred the huge deposits of his media outlets to a different bank, along with those of Bulgartabac, which he is said to control. The newspapers and tabloids controlled by, or sympathetic to, Peevski reported in detail that Vassilev had not only ordered the killing of Peevski but was also trying to bleed the bank dry. The fact that a few days later the accused assassins were released without any charges suggests this might have been part of a well-orchestrated smear campaign against Vassilev and CCB.
On June 16 panicked people started forming lines in front of the offices of CCB, while state-owned enterprises were reportedly trying to withdraw their deposits as well. On June 18 CCB informed the central bank that it had exhausted its liquidity and would discontinue all banking operations. The central bank took control of the bank in response, announcing that it would re-open on July 21. This left most customers without access to their deposits and increased the uncertainty.
Last Friday First Investment Bank (FIB), Bulgaria’s third-largest, became the second to be hit by a bank run. This time the panic was caused by a concerted speculative attack that involved spreading rumors via text messages to customers’ mobile phones. The uncertainty was further fueled by irresponsible public statements by politicians from both left and right jostling for position ahead of the parliamentary elections in the autumn.
Within a few hours, more than €400m had been withdrawn from FIB. The bank decided to close early and re-open on Monday. Fearful of the potential threat to financial stability, the authorities took some decisive measures to prevent contagion. The police arrested dozens of people accused of creating panic by spreading rumors, while the central bank urgently requested permission from the European Commission (EC) to step in and support FIB.
The EC responded promptly, allowing the Bulgarian central bank to borrow around €600m on the domestic market by issuing five-month government bonds. The EC issued a statement saying that the Bulgarian banking system was “well capitalized and has high levels of liquidity compared to its peers in other member states”.
According to Bulgarian president Rosen Plevneliev: “There is not a crisis in the banking sector. There is a crisis of confidence and a criminal attack.”
By Monday the lines of customers in front of FIB branches had quickly dissipated. Contagion in the Bulgarian banking sector appears to have been averted for the moment, but the political instability due to the elections, the continued infighting among powerful business figures, and the risk of further speculative attacks against banks increases the risk of financial uncertainty.
Some analysts have also suggested that Russia might be trying to destabilize the Bulgarian banking system as revenge for the decision by the Bulgarian government to stop the construction of the South Stream gas pipeline, which occurred under EU pressure and after a recent high-level visit by three US senators. The pipeline would provide an alternative route for Russian gas to Europe to the existing pipeline through Ukraine. Especially while it remains uncertain what lay behind these attacks on the banking sector, the country is likely to remain on edge in the coming weeks and months.
Dr. Kiril Tochkov is an Associate Professor of Economics at Texas Christian University. A native of Bulgaria, he studied Chinese and Economics at Ruprecht Karls University in Heidelberg, Germany, and at Beijing Foreign Studies University in China. He received a Ph.D. in Economics from the State University of New York at Binghamton in 2005.
This article first appeared in The Conversation. Click here to go to the original.