July 12, 2014

The Curious Case Of The Bulgarian Bank Runs - by Frances Coppola*

*(I write about banking, finance and economics)

So now we know what lies beneath the recent Bulgarian bank runs. Fraud.

The Bulgaria National Bank (BNB) has conducted an audit on the books of both CorpBank and its recently-acquired Credit Agricole - Bulgaria subsidiary.

According to BNB the subsidiary is sound, but CorpBank itself is anything but:

Findings of the Corporate Commercial Bank audit are, speaking mildly, actions incompatible with the law and best banking practices.

Missing, and most likely to have been destroyed in the days before conservatorship, is a material credit record of a credit portfolio amounted to 3.5 billion lev out of a 5.4 billion lev total loan portfolio.

A significant part of this portfolio shows a very high connectivity between debtors and majority shareholder Mr. Tsvetan Vassilev.

As a result of lack of information, the auditors express an opinion that they cannot evaluate the financial condition of the debtors’ ability to service their loans.

The availability and quality of collateral also cannot be evaluated, which in turn makes it impossible to draw a final conclusion on the status of the loan portfolio amounting to 3.5 billion lev.

Unfortunately, these actions cannot be registered with the tools of off-site bank supervision and are suggestive of intentional abuse.

These particular actions of officials in Corporate Commercial Bank are likely to amount to knowingly defrauding the bank of hundreds of millions lev.

It is evident that the minority shareholders of Corporate Commercial Bank are also victims of these abuses.

For these reasons today BNB will bring the auditors’ report on the review of the assets and liabilities of the Corporate Commercial Bank to the attention of the Attorney General of the Republic of Bulgaria.

(original in Bulgarian)

Because of the extent of the fraud, BNB say that nationalizing CorpBank is not an option – it describes it as “a bottomless barrel”.

CorpBank will therefore be wound up. Its banking license will be revoked, and all “good” assets and liabilities will be transferred to its Credit Agricole-Bulgaria subsidiary, which will be nationalized.

All deposits except those associated with majority shareholder Tsvetan Vassiliv will be guaranteed by the state.

According to Reuters, the Bulgarian Finance Ministry estimates that the cost of the deposit guarantee will raise the public deficit from 1.8% of gdp to 3%, putting it at the Maastricht treaty limit.

This will be seen as a considerable disappointment in Brussels, which in the recent European Semester report advised the Bulgarian government not to allow the deficit to rise any further.

And it raises considerable questions about the capability of the BNB to supervise banks effectively.

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Only a month ago CorpBank was given a clean bill of health. Now it is bankrupt because of a major fraud. (. . . .snipped)
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Source: http://www.forbes.com/sites/francescoppola/2014/07/12/the-curious-case-of-the-bulgarian-bank-runs/

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