Re the situation in the Bulgarian banking industry: - I wrote a piece explaining the background, published Thursday, here is the link: 4liberty.eu/reputation-matters-a-not-so-typical-june-2014-bank-run-in-bulgaria-a-public-choice-perspective/ ; but I am now keeping some sort of a dairy on what goes on; and I am afraid it may get worst; What happens as we speak is the following: - BNB auditors found BGN 3.5 bln worth of contracts with missing documentation, so it cannot determine how sound is the CCB: e.g. they do not (yet) know what portion of these credits fall into different categories (monitored - 10% provision required, non-performing - 50%, and loss - 100% provisions) and what provisions were made how healthy, liquid the respective collateral; it is likely that the provision are somewhat substantial; 3.5, however, are roughly 60% of the banks portfolio, i.e. 40% are serviced; the last CCB report says that the deposit base is roughly 100%, but it could have deteriorated since May; - On these findings, BNB announced that it sees the resolution in the following (details are here: bnb.bg/PressOffice/POPressReleases/POPRDate/PR_20140711_EN) reading of my own: 1. It revoke the CCB license for activities of the majority shareholder benefitting affiliated companies and clients, and other illegal deeds 2. will nationalize and reopen Credit Agricole EAD, transfer into it all the good assets and liabilities - notably deposits of individual and companies but except for the deposits of the majority shareholder (and of affiliate companies); and the New Bank will enjoy absolute liquidity support; 3. since such actions are not allowed by the law and constitution, BNB calls upon legislators to adopt an ad hoc bill that legalizes the plan; 4. since the head of the supervision is under investigation, the governor should resume his responsibilities (and this requires legislatures amendment of the Article 20.3 of the BNB Law). - This plan invoked different sorts of reaction by the public opinion, of which I find two important ones: a. The absolute liquidity support was understood as deposit guarantees for all deposits, i.e. of those above the legally required minimum of EUR 100 K; this reaction is very negative, and puts a general question mark on the entire plan; b. politicians, mostly Socialist ones, claimed BNB is to be blamed and the governor should be dismissed. - Re my take of these developments: • I do not see problems with above point 4. • Above b is absolutely risky and dangerous: there is no other institution to meet BNB tasks, if the politicians attempt to replace the Governor, the entire Board will go and it will be replaced by package of Peevskis; this option gets public support too; if politicians who meet tomorrow at Presidents National Security Council opt for such option, no one can predicts what is the end of the story. • An ad hoc Law is a bad thing in general, contradicts the constitution, the contracts and the trade laws (but it is totally in line with the EU draft Bank Recovery and Resolution Directive (to be enforced after January, 2016) -- it may end up in legalistic nightmare and a constitutional case; the draft bill was just leaked (A CCB Insolvency Draft Law) - my fist impression is that it is on the verge of the rule of law and would go through the parliament if the amount of the bailout is determined. • a court procedure would be in line with the Bank Insolvency Act, but will take at least two weeks, and BNB does not seems to trust the Sofia District Court or its efficacy. • The absolute liquidity support may just be a sort soothing rhetoric but it will most likely cause an amendment of 2014 Budget Law, and protract the term of the incumbent parliament. • It is not clear whats the timing of the plan (although this is one of the major reason to draft it in the first place); therefore the criteria of good assets and liabilities is simplified to shareholder and affiliates: this criterion would be applicable if and only if Vasilev is found guilty in a court of law. • beyond this, however, it is quite unclear how anyone on Earth can define affiliates; the new draft bill does not help this task either; the good think about the draft is that it leaves for due diligence determination of the BGN 3.5 bln. redistribution to different categories of assets and that the phrase absolute liquidity support is just a phrase; I should note, however, that I still need to read the draft carefully.
Posted on: Sun, 13 Jul 2014 15:12:10 +0000
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