Bulgaria’s Strange Bank Run

EU Approves Emergency Liquidity Injection

Over the past week, there has been a run on two of Bulgaria’s biggest banks – late last week, the central bank ordered one of them closed, since it could not possibly pay all the deposits that were supposedly available “on demand” -  as is always the case in fractionally reserved banking systems. On Monday the situation calmed down somewhat after the EU approved an emergency liquidity injection of 1.7 bn. Euro:

“Bulgaria’s banking system appeared to be stabilizing late on Monday after the EU approved a Lev3.3bn (€1.7bn) emergency credit line from the central bank, following runs on two of the country’s biggest lenders in a week.

The liquidity move followed assurances from political leaders over the weekend  that Bulgarians’ savings were safe and the banking system was stable and well capitalized, in spite of a speculative attack involving anonymous text messages and emails.

Yes, well capitalized, but not well enough to actually withstand a bank run without emergency aid and a “bank holiday”. The story of how the run started is certainly a strange one:

The Bulgarian National Bank had warned on Friday of an “attempt to destabilize the state through an organized attack against Bulgarian banks”, as Bulgarians withdrew Lev 800m from branches of First Investment Bank, the country’s third-biggest lender.

Those withdrawals came just days after a run on Corporate Commercial Bank, the country’s fourth largest bank. Six people were arrested over the weekend, accused of sending electronic warnings that FIB was about to collapse; two were indicted on Monday for spreading false information on banks.

Rosen Plevneliev, Bulgaria’s president, also announced late on Sunday that after talks with party leaders he would dissolve parliament by July 25 and then name a caretaker administration, ahead of early elections called for October 5. That move helped ease political uncertainty that had fueled the crisis.

Bank shares recovered sharply on Monday after news of the central bank credit line. The European Commission also noted that the country’s bank sector was “well capitalized and has high levels of liquidity compared to its peers in other member states”.

“The situation has stabilised over the course of the day,” said Alex Bebov, managing director at Balkan Advisory Company, a Sofia-based brokerage.

“This was a very different style of banking crisis than, for example, in Slovenia, where you had a lot of fundamentals. Here it was much more an issue of cyber attacks, via SMS [text messages] and the internet.”

So Bulgarian banks are actually in better shape than banks elsewhere in Europe?   Does the EU commission mean to convey that the rest of Europe should panic while there’s still time?

There was by the way media silence over what happened until the crisis was essentially over. The earliest mainstream reports we could find were dated June 29 – after the arrests alluded to above were already made. The perpetrators are accused of spreading “false information about the health of Bulgaria’s banking system”. However, given that the banks concerned needed to be closed and  rescued with an emergency loan once depositors wanted their money back, one could just as well argue that they were actually spreading the truth about the banking system rather than false information.