Banks, the eurozone and the shorthand records

Banks, the eurozone and the shorthand records

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It is commendable that membership in the Eurozone has become an immediate task for this government – including joining the interim ERM2. But the decision-makers at the top fail to look critically at key system features of the Bulgarian banking system. They prefer to focus on the technical criteria without assessing the level and depth of the challenges ahead before the convergence of the Bulgarian banking system into the Euro area.

 

Against this backdrop of events around the CCB crisis, how serious and credible is the institutional capacity in the central bank to tackle the banking and financial problems before reverting them to the Eurozone? The BNB oversees and guarantees the health of the banking system, at least in theory. Yet at the same time, two presidents, one former and one incumbent – people with access to the most critical information in the country – are openly warning that making public the memos on meetings dedicated to CCB’s fate might endanger particular banks and the stability of the banking system as a whole. Whether the fears are real or the threats lie in the destructive potential for speculative interpretations is irrelevant.

 

What message do you think Bulgaria is sending to the ECB board and the EC on the country’s readiness to join the ERM-2 as the front gate to membership in the Eurozone?

 

It would be normal for the Brussels and Frankfurt-based top supervisors of the Eurozone to be skeptical on Bulgaria, as the time for leniency and self-deception has elapsed. The Eurozone does not need new liabilities or vague promises. Yes, the common currency area in the EU may shake to the bones, due to lack of discipline and multi-speed conduct of its members. Many predict a collapse, but it is the Bulgarian state that wants to join this union and not vice versa – henceforth full compliance is a sine qua non.

 

The decision to be allowed in the ERM-2 is primarily political and trust is its most important ingredient. If things were really bad at the time the meetings with the president and at the board of the BNB took place, what would be the added value of keeping the facts away from the public scrutiny when there is a clear and overwhelming public interest?

 

If the banks mentioned on the quiet were then “rotten” apples, both the BNB and its management had enough time to raise their capital adequacy to deal with NPLs and improve reporting and management.

 

If these banks are still problematic, what are the merits of keeping the truth under the rug, fooling depositors, creditors and investors? It is their money at risk, not the politicians attending meetings at the president’s office and the BNB.

 

If the problems are not specific to an individual bank, but are of a systemic nature, as the European Commission, the IMF and the World Bank imply in their stress test, keeping the mouth shut is counter-indicative. Disturbing levels of bad loans, inadequate capital reserves, reporting gaps, and the dangerous concentration of credits to related parties as revealed in the stress test are not walking away with secrecy.

 

In the midst of the CCB crisis, I warned that forced bankruptcy for political reasons and serving oligarchic interests will deny a proper diagnosis and appropriate remedial action. The source of the problems – the faulty and criminal conduct of the owner/managers-turned-investment bankers and the circles around them is largely left unscathed. The root problem is the unidentified and unmitigated political risk in the system that lies at the core of our current anguish.

 

The BNB is unable to pre-empt a new bank crisis on its own. Nothing has changed since CCB sunk – Bulgaria is still in a currency board regime, which limits the Central Bank’s ability to act as a lender of last resort. There is no guarantee that the oligarchs have in way limited their influence and capacity to inflict prohibitive damage. Nor would the general prosecutor’s office guarantee an encore in repetition of the destructive action it undertook overriding the BNB if and when it deems its authority challenged.

 

BNB’s crisis management capacity henceforth relates to the government’s response and the sense of expediency of the political elite. Ultimately everything rests on trust and political expediency when reason and experience are called for.

 

The reasoning and decisions taken by government and politicians in the CCB crisis are not unambiguous. Part of the inflicted damage to the bank is the result of deliberate inaction, including from the Treasury. Under vague criteria, the minister of finance in the Oresharski government decided to save one of the banks in trouble, but to sacrifice the other – with no preceding professional or independent analysis. The decision on the CCB’s coup de grace was taken in a narrow circle of politicians, prosecutors and bankers without an objective third party second opinion. It is difficult to argue what has carried more weight – whether the immediate urge to act instantly leaving society in the dark or the apprehension that arguments would come in the course of investigation. i.e. post factum.

 

Bulgarian banks and the independence of the BNB should be protected from the destructive power of the political elite. While Western banks or their branches in Bulgaria can afford to refuse loans to the privileged oligarchic circles because they have an “ambassador” to turn to and a country to protect them, bankers in banks with Bulgarian owners do not enjoy this luxury.

 

The infamous former owner of CCB Tsvetan Vassilev is in Belgrade, without any lever to influence the redistribution of assets and rerouting insolvency mass proceeds. The syndics and the receivers have done their utmost to channel the “benefits” into the “right” hands while the liabilities have been bestowed on the state. Not many people would consider this a merit of the system when applying for entry into the ERM2.

 

The monetization of the insolvency mass to date does not leave the state many chances to recover its credit to the Citizens’ Deposit Guarantee Fund (CDGF). If anyone voices concerns that the disclosure of the content of meetings memo in which, according to media leaks, the then-BNB governor has been sharing inconvenient and overtly frank ‘truths’ about the state of banks other than CCB, he has a good reason.

 

The first level of concern is the current unenviable state of the CDGF, whose liabilities are three times higher than assets. There could hardly be a more conspicuous risk to the banking system than lack of rescue funds. Before CCB sunk, the deposit guarantee fund had nearly 2 billion levs in store, which proved insufficient to cover all guaranteed deposits.

 

Today reserves of the CDGF are four times less. Worth noting is that at least three banks on the watch list were advised to raise their capital reserves and improve management practices for non-performing and related parties.

 

The current CGDF reserves are clearly insufficient to cover even smaller bank defaults, let alone to secure repaying the CCB loan to the budget. The option to hike bank contributions to the fund is neither realistic nor rational. The logic of a shared rescue fund covering guaranteed deposits rests on the intolerance towards deficits in BNB’s banking system oversight, the EC’s input and the public trust in the government response to bank crises.

 

The general wisdom is that banks’ problems should be treated quietly, as mistrust and tension may be generated without specific reason. But the deafening silence can also serve as a convenient cover for destructive action and crimes. The oligarchs aim to profit from vulnerabilities in the public shield of BNB. They have become richer by billions following CCB’s bankruptcy, profiting from the silence in the media and incapacitated institutions. When the audience complies with the ‘keep quiet’ rule, some get richer; others are impoverished.

 

This mistaken logic has its limits as we blur the border between poor and good governance, between good and bad bankers, thus trivializing the shortfalls in bank supervision. Malign practices are neither born, nor end with CCB and Tsvetan Vassilev.

 

The key systemic risk remains – the typhoon that transcends banks, amplified by greed or incompetence of empowered politicians, oligarchs and captured institutions, all at the expense of the national interest and robbing taxpayers. In the current power model, power commands sufficient resources to block BNB’s and the judiciary’s reaction at every stage – prevention, treatment and prosecution of the culprits.

 

Bulgaia is unable to provide a clear answer to the ECB and the EC regarding the type and depth of banking system problems as there is no one to investigate the repressive acts of the prosecutors’ office against the members of the BNB Board, lasting for more than a week. These ended with a change of mind of the BNB managements regarding the state of the CCB and the decision not to pursue the rescue option?

 

Who could in his normal state of mind assume that when the general prosecutor decides to send in his ‘troops’ in the offices of CCB and investigate Tzetan Vassilev on allegations of a death threat on Peevksi the prosecutors had a comprehensive or even preliminary knowledge of the terminal status of CCB and the irreparable evil nature of the owner – something the BNB Governing Council was unaware of? Accepting such a fallacy would mean that the expertise on banking supervision rests in the general prosecutor’s office and there is no need for independent BNB oversight.

 

At this moment in the analytical work an important conclusion springs to mind – as the prosecutors, for obvious reasons could have neither possessed nor will ever be in command of specific supervision expertise on banks at par with the central bank. Alleging the contrary would mean that there is no need for a central bank in its present form. At any rate – this confirms that the central bank governor and the board were not in charge of the situation – someone else, outside of the institutional frame, coordinated the repressive action, without being entitled or disclosed.

 

To put this in a nutshell, the political risk that caused the banking crisis around CCB – which presents a mortal threat to Bulgaria’s national security – has not been mitigated; the demon is very much set loose and ready to strike again.

What will the EC and the ECB deduce from the whole situation? Note that the pivot of our thoughts does not end on the scope and depth of guilt of the CCB owner, but around the systemic flaws, the quality of judgment, the independence of the decision-makers and the relevance of the processes, rules and procedures.

The oligarchic model in the banking system is made possible only through action or inaction of those authorized to govern on behalf and with the taxpayers’ money. Even if the judiciary system provides the ultimate guarantee for the sustainability of the model, the oligarchs are never safe, as they have few defense lines against the wrath of the people on the street. This is calmed through infusion of budget money, quelling the fires of public discontent.

 

Sooner or later, the virus in the oligarchic model will take the next bank victim. It is getting stronger, feeling invincible.

 

We should not be surprised should the European Central Bank and its team prefer to focus on the informal criteria for membership in the Eurozone – the quality of judgement and reaction of the institutions. For now, these are not particularly encouraging – reforms are stalled and most never kicked off the ground. Key institutions are captive to dependencies with high political risk for business, including banking, making the situation look hardly conducive to EZ membership. The perception of stability and tranquility are misleading and the ECB and EC are aware.

 

I suspect that key members of the government have finally realized that the adequate and independent supervision and buffers in the banking system are inconsistent with the oligarchic model. The dilemma is clear – either they exit the currency board, to allow the Central Bank to act as lender of last resort and “save” insolvent banks or embark on a fast track to the eurozone by curbing excesses in the oligarchs’ power.

 

There is no need to mourn the fate of the model and its main beneficiaries – the political and business oligarchs. Most of them have already cashed in their influence and bonds to the government becoming extravagantly rich. The problem is that oligarchic capitalism is parasitic and devastating. It depends on warm connections to banks and privileged loans to the budget and brokerage services to more creative businessmen. Without the prosecutors and their repressive force, however, the oligarchs are extremely vulnerable. In a way they could be kings for a day.

 

The final exit option, in the extreme, is a billionaires’ “exile” abroad.

 

It is high time that the citizens have direct knowledge on the banks that are managed well and the ones that have a double bottom. They are entitled to know the conversion mechanism through which the owners or managers turn their deposits into personal and group wealth.

 

The publication of the memos from the various meetings at the president’s office and the BNB is not a panacea. But the more open, expert and public debate on topics, and above all, real actions and changes are.

 

Not only because Bulgaria needs to enter the Eurozone, but for our own sake.

 

By Ilian Vassilev

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