Friday

20th Apr 2018

Opinion

How the EU can help Bulgaria avert another banking crisis

  • "The case painfully reveals the toxic consequences of mixing politics and banking" (Photo: EUobserver)

In a few short weeks Bulgarian authorities are due to announce the name of the next governor of the country’s central bank. Until half a year ago, this seemed like a routine decision that would not attract the sustained attention of the general public.

However, in the summer of 2014 a run on Corporate Commercial Bank, Bulgaria’s fourth largest bank (KTB), shattered the myth that the country had become an island of financial stability in Eastern Europe.

Thank you for reading EUobserver!

Subscribe now for a 30 day free trial.

  1. €150 per year
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

In the wake of KTB’s collapse, Bulgaria’s banking sector is at a critical juncture and much rides on what changes the next governor will bring.

Can the sector reinvent itself, as it did following a meltdown in 1997? Or will the systemic problems uncovered by the KTB debacle persist and deepen, ultimately threatening financial stability?

The EU has significant interest in avoiding financial turmoil in yet another member state. This is particularly true in Bulgaria, given that European banks hold 75 percent of the country’s banking assets.

To date European policymakers appear to have paid little attention to Bulgaria’s financial drama. Now is the time for the EU to engage, and encourage reforms to the governance of the central bank.

The toxic mix of politics and banking

While the public may never learn all the details surrounding the rise and fall of KTB, the case painfully reveals the toxic consequences of mixing politics and banking.

KTB’s success was enabled by several governments, which concentrated the deposits of publicly owned companies at the bank, giving it a cheap source of funding.

Politicians found this useful because the bank owner was allegedly affiliated with a powerful MP and media mogul, who offered positive media coverage in exchange for cheap financing.

In summer 2014, a bank run led to the closure of KTB. An accounting post-mortem revealed a hole of $2.6 bn, or two thirds of the bank assets (worth 5% of Bulgaria's GDP), traced back to fraudulent lending by the bank owner to companies controlled by himself or his political partner.

Paying out insured deposits pushed Bulgaria’s deficit to 3.7 percent of GDP and over the Maastricht criteria.

Where were the regulators?

Some newspapers had run stories on KTB’s political connections as early as the beginning of 2013. This raises a painful question: where were the regulators?

The role of regulators is to supervise banks and to correct market failures by behaving as independent technocrats.

Yet, such agencies are vulnerable to capture by political and economic agents as the benefits of regulation are diffused across the whole population, while its costs are concentrated among a small group of powerful and organized vested interests.

As long as these interest groups were aligned, their influence pushed Bulgarian regulators to turn a blind eye to KTB’s mounting issues.

Three priorities for Central Bank reform

What will it take to ensure Bulgarian regulators act in the interest of the public and not in that of well-connected individuals?

Three crucial reforms are needed to improve the leadership, accountability and transparency of the Bulgarian National Bank (BNB), which is responsible for regulating the country’s banks.

First, the next governor, due for appointment in late 2015, should be a respected technocrat selected in a transparent manner.

Governors need to be approved by the national parliament, which has resulted in appointees based on political loyalty rather than economic knowledge. This time the process should be structured as an open public competition above party politics.

Bulgaria can follow the example of the United Kingdom which advertised openly for the position of governor in 2012, drew a shortlist, and published a detailed report of the procedure after the appointment.

Second, the KTB case has revealed accountability weaknesses in the institutional setup of the Bulgarian National Bank, BNB, that must be fixed.

In particular, while the deputy-governor responsible for banking supervision has been put under criminal investigation, the governor himself has implausibly denied responsibility for regulatory failures.

If banking supervision is to remain within the central bank, the governor needs to also be made legally responsible for the actions of the deputy-governors.

Otherwise, banking supervision should be separated into an independent agency in order to streamline accountability and increase the costs of capturing regulatory processes.

Third, the BNB needs to significantly increase transparency.

In particular, it should carry out an inquiry into the systemic regulatory failures that led to KTB’s collapse.

Furthermore, regulators should recognise the key role of the media and whistleblowers in exposing irregularities and develop procedures to trigger investigations of such claims.

Unfortunately, key regulators have recently been moving in the opposite direction, using their powers to silence critical media outlets.

Towards adoption of the euro

Improving governance begins at home, but the EU has the power to play a key role in supporting the process.

Since mid-2014 there has been a wide political commitment within Bulgaria to join the ECB’s Single Supervisory Mechanism (SSM). Joining the SSM is likely to remain a key objective for Bulgaria, especially if it is to move towards adoption of the euro.

The ECB should clearly articulate that strengthening the accountability, transparency and independence of the BNB is a key prerequisite for Bulgaria’s application to join the SSM.

For Bulgaria’s policymakers, this will provide strong political incentives to reform the BNB – starting with organising the selection process for the next governor in a transparent manner.

For the ECB, this would guarantee that the new SSM member would be abiding by the key norms of central banking. For the Bulgarian taxpayer, this would hopefully mean better bank supervision and no more KTB-like failure.

Memories of last summer’s banking debacle are fading quickly and other priorities are beginning to dominate the political agenda. Yet, as experience has shown, in Bulgaria the prospective benefits of the EU are among the strongest drivers of reform.

The upcoming selection of a new governor provides a window of opportunity to tackle the problem of capture through changes in the structure, leadership, and transparency of regulatory agencies.

Bulgarians should heed Churchill’s dictum: “Never let a good crisis go to waste”.

Ivaylo Iaydjiev is a doctoral candidate at the Blavatnik School of Government at the University of Oxford, affiliated with the Global Economic Governance Programme and worked previously in the Office of the President in Bulgaria.

EU raises alarm on Bulgaria corruption

Seven years after joining the EU, Bulgaria has done little to curb corruption and organised crime in a threat to its sovereignty and to European unity.

More commitment to renewables from Council, please

More and more consumers are likely to invest in solar panels in the future as it becomes simpler to produce one's own electricity, writes Monique Goyens, director general of BEUC, the European Consumer Organisation.

EU should ensure sustainable Cohesion Policy

As the EU Council kicks off negotiations over the post-2020 budget, ministers have have an opportunity to create a framework that will unlock innovative financing and scale up the citizen-led clean energy transformation

How to reset EU-Burma relations

Europe should go back to its pre-2012 policy, wipe away aid and trade benefits, and tie democratic efforts to the reinstatement of benefits.

How to reset EU-Burma relations

Europe should go back to its pre-2012 policy, wipe away aid and trade benefits, and tie democratic efforts to the reinstatement of benefits.

News in Brief

  1. MEPs urge better protection for journalists
  2. Dieselgate: MEPs back greater role for EU in car approvals
  3. European parliament adopts new organic farming rules
  4. EU granted protection to half million people in 2017
  5. Report: Facebook to carve 1.5bn users out of EU privacy law
  6. Greek court ruling permits migrants to travel to mainland
  7. Commonwealth summit hopes for trade boost after Brexit
  8. Merkel and Macron meet to finetune eurozone reform plans

Stakeholders' Highlights

  1. ILGA EuropeParabéNs! Portugal Votes to Respect the Rights of Trans and Intersex People
  2. Mission of China to the EUJobs, Energy, Steel: Government Work Report Sets China's Targets
  3. Martens CentreJoin Us at NET@WORK2018 Featuring Debates on Migration, Foreign Policy, Populism & Disinformation
  4. European Jewish CongressKantor Center Annual Report on Antisemitism Worldwide - The Year the Mask Came Off
  5. UNICEFCalls for the Protection of Children in the Gaza Strip
  6. Mission of China to the EUForeign Minister Wang Yi Highlights Importance of China-EU Relations
  7. Nordic Council of MinistersImmigration and Integration in the Nordic Region - Getting the Facts Straight
  8. Macedonian Human Rights MovementMacedonians in Bulgaria Demand to End the Anti-Macedonian Name Negotiations
  9. Counter BalanceThe EIB Needs to Lead by Example on Tax Justice
  10. ILGA EuropeTrans People in Sweden to be Paid Compensation for Forced Sterilisation
  11. International Partnership for Human RightsThe Danger of Standing Up for Justice and Rights in Central Asia
  12. Mission of China to the EUChina and EU Must Work Together to Promote Global Steel Sector

Latest News

  1. Obscurity surrounds EU military fund's expert groups
  2. New EU party finance rules short circuit accountability
  3. Draghi to stay in secretive 'lobby' group
  4. Bulgaria offers lesson in tackling radical-right populists
  5. Getting secret EU trilogue documents: a case study
  6. Selmayr case scars Parliament and Commission
  7. Beyond macho: Turkish-EU ties
  8. 'Flobert' guns - Europe's latest terror loophole

Stakeholders' Highlights

  1. Swedish EnterprisesEU Tax Proposal on Digital Services Causes Concern for Small Exporting Economies
  2. Europea Jewish CongressCondemns the Horrific Murder of Holocaust Survivor Mireille Knoll in Paris
  3. Mission of China to the EUAn Open China Will Foster a World-Class Business Environment
  4. ECR GroupAn Opportunity to Help Shape a Better Future for Europe
  5. Counter BalanceControversial Turkish Azerbaijani Gas Pipeline Gets Major EU Loan
  6. World VisionSyria’s Children ‘At Risk of Never Fully Recovering', New Study Finds
  7. Macedonian Human Rights MovementMeets with US Congress Member to Denounce Anti-Macedonian Name Negotiations
  8. Martens CentreEuropean Defence Union: Time to Aim High?
  9. UNESDAWatch UNESDA’s President Toast Its 60th Anniversary Year
  10. AJC Transatlantic InstituteAJC Condemns MEP Ana Gomes’s Anti-Semitic Remark, Calls for Disciplinary Action
  11. EPSUEU Commissioners Deny 9.8 Million Workers Legal Minimum Standards on Information Rights
  12. ACCAAppropriate Risk Management is Crucial for Effective Strategic Leadership

Stakeholders' Highlights

  1. EPSUWill the Circular Economy be an Economy With no Workers?
  2. European Jewish CongressThe 2018 European Medal of Tolerance Goes to Prince Albert II of Monaco
  3. FiscalNoteGlobal Policy Trends: What to Watch in 2018
  4. Human Rights and Democracy NetworkPromoting Human Rights and Democracy in the Next Eu Multiannual Financial Framework
  5. Mission of China to the EUDigital Cooperation a Priority for China-EU Relations
  6. ECTACompetition must prevail in the quest for telecoms investment
  7. European Friends of ArmeniaTaking Stock of 30 Years of EU Policy on the Nagorno-Karabakh Conflict: How Can the EU Contribute to Peace?
  8. ILGA EuropeCongratulations Finland!
  9. UNICEFCyclone Season Looms Over 720,000 Rohingya Children in Myanmar & Bangladesh
  10. European Gaming & Betting AssociationEU Court: EU Commission Correct to Issue Guidelines for Online Gambling Services
  11. Mission of China to the EUChina Hopes for More Exchanges With Nordic, Baltic Countries
  12. Macedonian Human Rights MovementCondemns Facebook for Actively Promoting Anti-Macedonian Racism