July 15, 2014 / 10:19 AM / 6 years ago

Bulgaria central bank starts talks about European supervision

SOFIA (Reuters) - Bulgaria’s central bank has begun talks with the European Banking Authority about conducting a review of the quality of its banking supervision, it said in a statement on Tuesday, following runs on two lenders in June.

Bulgarian President Rosen Plevneliev arrives to deliver a statement in the Presidency in Sofia June 17, 2014. REUTERS/Stoyan Nenov

The Bulgarian National Bank has also been in touch with the European Central Bank about joining the European Single Supervisory Mechanism (SSM), the statement said.

Bulgaria would be the first country outside the 18-nation euro zone to join the Single Supervisory Mechanism, set up in response to the global financial and euro zone debt crises, though neighbouring Romania has said it could apply for membership next year.

Bulgarian President Rosen Plevneliev announced Sofia’s intention to join the European supervision scheme on Monday, as the government grapples with the fallout of the country’s worst financial crisis since a slew of bank collapses in the 1990s.

There is still no agreement on a deal between the ruling coalition and the opposition about the terms of a rescue package after a run on deposits at Corporate Commercial Bank (Corpbank) 6C9.BB, Bulgaria’s No. 4 lender, in June.

The run on Corpbank and the subsequent hit on another lender raised questions about the quality of banking supervision in the Balkan state, which joined the European Union in 2007 and is its poorest state.

“The central bank has already initiated contact with the executive council of the European Central Bank as part of the preparation for talks between the head of state and the ECB president to start a procedure to apply for membership in the single supervisory mechanism of the EU,” the Bulgarian central bank said in a statement.

The ECB declined to comment, but a source familiar with the process said any application would take several months and could not be processed in time for Bulgaria’s banks to undergo the landmark review of euro zone lenders that the ECB is carrying out this year. If the application proceeds, Bulgaria’s banks would go through a similarly robust analysis before the ECB takes over their supervision.

The central bank seized control of Corpbank following a run on the lender by depositors unnerved by reports of shady deals involving its main shareholder, Tsvetan Vassilev, and amid a public feud between Vassilev and a business rival.

Vassilev has denied any wrongdoing and said the run, during which more than a fifth of deposits were withdrawn, was a plot against him by his rivals.

The troubles at Corpbank, where state companies kept a large part of their funds for years, have brought renewed scrutiny of Bulgaria, including the murky relations between the political elite and powerful businessmen. The government has said it will let Corpbank collapse, transfer the good assets and liabilities of Corpbank to a recently acquired subsidiary, and initiate bankruptcy proceedings against Corpbank.

The plan requires a special law in parliament to be passed.

However, the delay in achieving a political consensus on the deal means that the planned reopening of the subsidiary, which would relaunch as a nationalized institution on July 21st, could also be postponed until further notice.

“Bulgaria’s central bank has committed to a date to open Corpbank - July 21 - provided that the politicians agree to the rescue plan and approve a special law for it. If there is no law, there is no fixed date,” a source said.

It remains unclear what the size of the bailout required to prop up the subsidiary will be. The government may issue new debt, which could swell the fiscal deficit to 3 percent of gross domestic product, against a planned 1.8 percent for 2014.”The situation with Corpbank sheds light on illegitimate links between politicians and businesses. The bank’s case is seen as isolated as this bank had a special role - the intertwining of political and economic interests,” said Daniel Smilov, a political analyst at the Centre for Liberal Strategies, a Sofia-based think tank.  

“Bulgaria now has a chance to clean up and really prosecute all those who were responsible for the situation,” he said.

Additional reporting by Laura Noonan in London and Radu Marinas in Bucharest; Writing by Matthias Williams; Editing by Alison Williams and Susan Fenton

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