The small, impoverished country of Bulgaria may not be in the Eurozone (even though its currency is pegged to the Euro), but it is in the European Union. Which is why we find it surprising that there has been relatively little mention that overnight the fourth largest Bulgarian bank, Corporate Commercial Bank (Corpbank) and which in recent weeks has made headlines due to the political exposure of one of its largest shareholders, was seized by the Bulgarian central bank following what Reuters reports was a run on the bank.
With preserving confidence in the banking system key, and since the small country is not immune from failure unlike its southern neighbor which knows Europe will now never let its banks fail, the central bank promptly took to boosting morale, when its governor Ivan Iskrov begged depositors to stay calm, saying: "Let's not tear down our house."
Reuters also reports that the Bulgarian National Bank said it had taken control of Corpbank's operations for a period of three months and removed its management and supervisory board, but stressed it was not bankrupt. A Reuters photographer saw dozens of people queuing outside the main office of the bank in the Bulgarian capital on Friday.
The central bank said the run on the lender was triggered by adverse media reports, and that it acted after receiving information from Corpbank on Friday morning that it had stopped all payments and bank operations due to a liquidity drain.
"As you know, there has been a lot of talk about the bank and one of its shareholders, which triggered bank runs," central bank governor Ivan Iskrov said at a news conference. "It is very important to be very careful when we talk about banks. Let's not tear down our house alone unnecessarily."
"Let me make this very clear. Corporate Commercial Bank is not a bankrupt bank. We are acting swiftly to avoid a bankruptcy," said Iskrov.
Iskrov said the banking system was not so interlinked that Corpbank's situation would affect other commercial banks in the country.
Alas, appeals to keep calm failed when as AP adds, long queues could be seen Friday at the bank's offices as people become worried over media reports about the bank's poor finances. Turns out the media reports were right, although in a world of self-fulfilling prophecies one never knows what came first: the rumor (pardon fact) of insolvency, or the reports surrounding it.
While relatively small by European standards, there are 29 commercial banks operating in Bulgaria and about three quarters of the banking system's assets are foreign-owned. Among foreign banks with operations in Bulgaria are Unicredit, Raiffeisen Bank, Hungary's OTP , National Bank of Greece, EFG and Alpha Bank. Curiously, Russia's largest bank, VTB Bank, is a minority owner of Corpbank - it said it was ready to support the bank.
Bulgarian website Novinite provided further details about what may be the first domino in Bulgaria's banking sector:
Bulgarian National Bank (BNB)'s Governing Council held a press conference just an hour after the central bank announced it had placed KTB under special supervision upon the commercial bank's request. It decided to do so after KTB sent a letter asking for the step, due to “exhaustion of liquidity and termination of all payments and banking operations”.
With its move, as of June 20, 2014 BNB revokes the rights of KTB shareholders and appoints a supervisory board.
In the Governing Gouncil's statement to the media delivered at the press conference, Iskrov reminded that KTB was “among the banks with the highest liquidity" before a "rumor" involving a BNB Deputy Governor and his alleged dependency on "a certain bank" (implying the role of KTB) was spread by an anonymous e-mail sent from a purported central bank employee to the media.
The rumor coincided with the start of pre-trial proceedings against BNB Deputy Governor Tsvetan Gounev.
It also led to the withdrawal of "huge amounts of ready money" and prevented the bank from delivering on its liabilities, the BNB Governor explained
In the statement Iskrov presented the Governing Council's decision, under which BNB places KTB under supervision for a period of three months.
The bank is to freeze any operations within that stretch of time and is forbidden to perform any activity. As a result clients of the bank would have it difficult to be provided any services. A Supervisory Board of two members, Hristina Stanova and Slavyana Danailova, has been appointed.
BNB also temporarily dismisses KTB's four Governing Council members and four Supervisory Board members and transfers their competencies to its own two-strong board.
Voting rights of shareholders controlling more than 10% of KTB assets - namely Bromak Invest (owned by Tsvetan Vasilev) and Bulgarian Acquisition Company Luxembourg - are also being suspended for three months.
The BNB Supervisory Board is now virtually KTB's governing body, with "huge competencies" and in charge of safeguarding the bank's exclusion from the Bulgarian payment system.
The Board is also to conduct an assessment of the bank so that talks could be held with shareholders "and other potential buyers".
"Conversations with the shareholder having expressed interest are starting immediately. They can end in a day, a week or a month, when the interest has been confirmed by shareholders and they provide the respective support," Iskrov explained.
Perhaps the bigger problem for Bulgaria is that its central bank itself is now the target of an official probe after its deputy governor for bank supervision, Tsvetan Gounev, took a leave as a result of a pre-trial investigation aimed at him. Furthermore, From Sofia Globe:
Bulgarian National Bank (BNB) said on June 18 that its deputy governor for bank supervision, Tsvetan Gounev, has taken leave from the central bank as a result of pre-trial investigation against him.
In a statement posted on its website, BNB said that Gounev put in his leave request in order to “not allow any doubts about obstacles to the investigation”. The central bank said that “from the moment that the BNB was notified of Mr Gounev’s repealed permit for classified information, his access to such documents has been suspended.”
Repealing the permit for access to classified information is often the first indication that a senior official is under investigation.
The prosecutor’s office initially made no comment, but later in the day, Prosecutor-General Sotir Tsatsarov said that the investigation had been under way for two weeks and was a result of allegations made by the anti-government Protest Network.
(The prosecutor’s office statement did not specify which allegations this referred, but it is presumed to be in connection to the dossier based on media reports containing various allegations, submitted to prosecutors in February, which called for an investigation into media mogul Delyan Peevski, Corporate Commercial Bank majority shareholder Tsvetan Vassilev and Nikolai Barekov, the former talk show host-turned-politician that fronts the Bulgaria Without Censorship party.)
Earlier in the day, however, Bulgarian media reported receiving an anonymous letter, whose author claims to be an employee of BNB, alleging that Gounev was under investigation by prosecutors on charges of mismanagement in office.
The letter claims that Gounev failed to exercise proper oversight of a “bank that has become the centre of attention in recent days”, but did not name the bank. The author claims that both Gounev and BNB governor Ivan Iskrov “put pressure” on the bank supervision department not to apply proper oversight on the affairs of this bank and “have been financially dependent on this bank for years.”
So is this just a political witch hunt in a country notorious for backroom dealings, or the start of something greater? The answer will depend on whether the local population does indeed, as the central bank requests, stay calm or if people decide en masse once again that the best option is simply to put what little savings they have in the ir local mattress, while they still can (or before the Fed suggest fee gates be implemented, the same way it would like to force a ran out of US bank funds).