Banks in Bulgaria look and operate much as those in any industrialised country do; but that outward appearance belies the troubled history of banking under communism and in the years immediately afterwards.
When the global financial and economic crisis hit in 2009, Bulgaria’s government and banking authorities rushed to emphasise that the system was stable and well-capitalised and would be able to weather the mega-storm. So far, that has proved true, notwithstanding – among other things – an inevitable increase in bad loans and a firmer reluctance to lend as the crisis took hold.
That Bulgaria has its current range of banks – mostly foreign-owned – and banking products is a sign just how far the country has come from the darker days of the preceding decades, counting, as this story does, from the communist seizure of power after World War 2.
Bulgarian National Bank’s recounting of this period of history is couched in the restrained phrases of the central banker, that the 1947 law on banks carried out "drastic reform".
The law nationalised private banks and turned the banking system into a copy-cat of the Soviet model.
In the system that was to endure for the next four decades, BNB was made subordinate to the communist-era council of ministers and the ministry of finance and required to provided all financial services to the newly-created, highly centralised planned economy. The bank was obliged to lend directly to the then-government and the economy.
Kenneth Koford and Adrian E. Tschoegl, in a 2002 paper on the history of foreign banks in Bulgaria, recount how the government had been buying up banks from 1944 to 1947, but that year’s law nationalised all the banks, with the exception of the Kreditna Banka, which was exempted from nationalisation as former German property expropriated and transferred to the Soviet Union as reparations.
The Bulgarian government completed its takeover of the Banque Franco-Bulgare by formally buying out Paribas. Among the foreign-owned banks that it also took over were the PragueCredit Bank’s branch, the Italian-Bulgarian Commercial Bank, the Macedonian NationalBank and the Bulgarian Discount Bank.
In line with its other policies related to nationalisation and the creation of state monopolies, the then-government set up the State Savings Bank, DSK, for savings by individuals. DSK would play a key role in savings for private home ownership during the communist era (for more on the saga of nationalisation and restitution of private property, see Bulgarian Possession, The Sofia Echo, February 18 2011).
The communist government grab of banks was part of the wider story of the nationalisation of about 6000 enterprises. Before the communist seizure, banking in Bulgaria had not been a large-scale affair. The country had a mixture of small government-owned banks and some private banks, most either fully foreign-owned or joint ventures between the government and foreign players.
By definition, the communist model applied in Bulgaria excluded foreign participation in banks.
However, later years would see an outreach by the state banking operation, first in 1964 with the establishment of the Bulgarian Foreign Trade Bank (BFTB), which by 1986 had set up representative offices in London, Frankfurt and Vienna.
In 1987, according to Koford and Tschoegl, BFTB (49 per cent) and the Bayerische Vereinsbank (51 per cent) established the joint venture Bayerisch-Bulgarische Handelsbank GmbH, with its head office in Munich.
In 1988, BFTB (61 per cent) and the Soviet Union’s Vnesheconombank (39 per cent) established Bulgarsovinvest Bulgarian Russian Joint Finance Company.
In 1981, the government established Mineralbank to lend to small and medium enterprises, and in 1987 set up several new banks to specialise in lending to different sectors of the economy.
The latter years of communism in Bulgaria also saw intriguing episodes involving money. Cash was moving abroad, in part on projects such as the Neva project which involved attempts to acquire Western high-tech to which the communist bloc was barred access.
Controversial tycoon Robert Maxwell was involved as well, setting up Bulgarian Co-operative Bank and the Bank for Agricultural Credit.
Allegedly, along with the communist-era State Security, long-time dictator Todor Zhivkov and others, Bulgarian banks were involved in channels to smuggle money, looted from the treasury, out of the country and in international money-laundering operations. The sums said to have left the country allegedly run into hundreds of millions in hard currency.The internal party coup that saw the ouster of Zhivkov as communist regimes in Central and Eastern Europe met their end did not, in the case of Bulgaria, mean the departure from power of Bulgarian Communist Party nomenklatura; only the renaming of the party to substitute the word "Socialist" and a continuation of influence of people closely linked to State Security.
In the first years of the decade after the fall of Zhivkov, just as much of the economy remained in state hands, so did much of the banking sector. But transfers into private hands, because of the way the process was manipulated, were to bring disaster.
According to a paper by Gallina Andronova Vincelette, by the end of 1990, there were 70 commercial banks, of which seven sectoral, two specialist (the State Savings Bank and the Foreign Trade Bank), and 59 commercial banks emerged from the branches of BNB.
According to BNB’s website, the return of the Bulgarian banking system to the market economy principles and of the BNB to the independent central bank principles became possible only in 1991 when two basic laws came into effect – the Commerce Law, which brought back the legal foundations of commercial banking, and the new Law on the BNB, which restored the Bank’s autonomy and gave it the responsibility for supervising banks.
However, the large number of banks in the early years of transition in Bulgaria did not provide for high quality financial intermediation, Vincelette says.
Crisis and consolidation
Bad loans and liquidity problems worsened.
In 1992, the government set up the Banking Consolidation Company to deal with the large number of under-capitalised commercial state-owned banks, merging them into a smaller number of supposedly more financially viable banks with better prospects of privatisation.
Twenty-two state-owned banks were consolidated into one bank: the United Bulgarian Bank, and another 12 were united into the Express Bank.
But a liberal licensing regime and low capital requirements set the scene for a mess.
A lack of proper regulation by central BNB at the time saw dangerous lending practices. Unsurprisingly, serious foreign banks regarded the landscape with caution.
In 1994, Koford and Tschoegl write, the government rescinded its ban on branches of foreign banks and ING Bank became the first foreign bank to establish a branch.
Several Bulgarian and Russian institutions came together to found the Bulgarian-Russian Investment Bank (BRIBank) with 50-50 Bulgarian and Russian ownership. (BRIBank also established a representative office in Moscow.)
BFTB changed its name to Bulbank, acquired Bourgas Commercial Bank and Stara Zagora Commercial Bank and reincorporated Bulgarsovinvest as Corporate Commercial Bank AD, still with 61 per cent Bulbank ownership.
In 1995 two more foreign banks entered. Xios Bank opened a branch and Raiffeisen Zentralbank established a subsidiary. In the continuing process of domestic consolidation, Biochim Bank (Biochim) acquired Serdika Commercial Bank, Sofia Bank and SIRBank (Specialized Insurance and Reinsurance Bank).
In 1996, Ionian Bank and Bayerische Hypotheken- und Wechsel-Bank each opened a branch.
Two joint ventures commenced operation. One was the Bulgarian Investment Bank (BIB). The foreign shareholders included the European Bank for Reconstruction and Development (EBRD; 35 per cent), UBB (15 per cent), Biochim (11 per cent), Hebros Bank (five per cent), Banque Nationale de Paris (BNP; 15 per cent) and others.
Commercial Bank of Greece (CBG) took a 20 per cent direct stake in the bank and an 11 per cent indirect stake, as well as the management of the bank. Later, BIB changed its name to International Commercial Bank and then to Commercial Bank of Greece (Bulgaria) as the CBG bought out the other owners.Lastly, Banque Nationale deParis and Dresdner Bank formed BNP-Dresdner (Bulgaria) with each taking owning 40 per cent and the EBRD owning 20 per cent.
In March 1997 Istrocapital, a Slovakian investment group, received BNB permission to recapitalise the failed Bulgarian private Mollov Bank, which it renamed Eurobank. The recapitalisation brought foreign ownership in Eurobank to 92 per cent.
Allianz Bulgaria Holdings acquired the failed private Yambol Commercial Bank (est. 1989) and renamed it Bulgaria-Invest Commercial Bank.
The EBRD took a 20 per cent stake in First Investment Bank. National Bank of Greece and Société Générale each also opened a branch.
During this period, of the six private banks created in 1991, two—International Bank for Trade and Development Bank (IBTD), and International Bank for Investment and Development (IBID)—also had some foreign participation.
But for all the positive developments around foreign involvement, it was most local banks that were the problem. It was a perilous environment, for a number of reasons, not only a lack of deposit insurance – meaning that bank collapses spelt disaster for individual clients – but also because of widespread speculation that the government might unilaterally dip into bank deposits to solve the country’s worsening deficit.
As the financial crisis of 1996 took hold, 14 out of 35 commercial banks failed. These 14 banks had held 25 per cent of the consolidated balance sheet of the banking system. Eventually, the rate of collapse of banks during 1996 was such that depositors lost about 50 per cent of their savings.
Most analysts point to the problem being compounded by inconsistent and weak attempts by the government at reform and, allegedly, politicians wanting to conceal the extent of the shortcomings in the banking system to avoid feeling the wrath of angry depositors.
Time and again, the central bank extended bail-outs. It was a period of desperate measures throughout the economy. Bulgaria issued ZUNK bonds (under the Act on Settling Non-collectible Debts) with a total face value of $1.808 billion in 1994 to convert bad debt of state-owned firms into government debt.
But the situation was set to create long-term anger, which endures today in a term that still – with good reason – has currency: "credit millionaires".
Individuals and major business groups benefitted from huge loans, running into billions of leva. One example is the 91 billion leva lent by BNB to First Private Bank. There are many others.
Today, there are still credit millionaires in various countries who are subject to attempts – often prolonged and unsuccessful – at extradition to face prosecution in Bulgaria.
In April 1996, the lev started plummeting in value, reaching effective collapse in February 1997. In the course of 1996, the leva plunged from 70 to the US dollar to close to 500. An eruption of public anger and mass protests would bring down Zhan Videnov’s socialist government, opening the way for elections that brought victory to the centre-right Union of Democratic Forces government, and in turn, the introduction of the Currency Board to shield the lev from dangerous fluctuations.
According to research done by the William Davidson Institute at the University of Michigan, by Shannon Mudd and Neven Valev, a national household survey in 2008 found that people who had lost money in 1996 were significantly more likely to expect a new crisis.
The survey was done at a time when more than 90 percent of Bulgarian banks had been owned and operated by foreign banks for several years.
"The change in ownership and improved environment had led to substantial investment in banking services and generated a network of branch locations throughout the country," according to the report, which also outlines the wide range of various financial services that had become available.
"Given the length of time and more recent, sustained stability and growth in the Bulgarian economy, this persistent effect of a past negative experience on current expectations indicates how difficult it is to regain trust in the financial sector."