The way out of the crisis is to close the FSC

Author: Martin Nikolaev

One of the previous chairmen of the Financial Supervision Commission and a manager of part of the largest financial and industrial group in the country stated that “today the FSC finally died”. The committee, which has been completely overwhelmed by its competences and is now completely political, is truly experiencing its worst days. And instead of this senseless agony continuing until the inevitable failure in the valuation of the assets of the non-banking sector, the Bulgarian parliament can kill six birds with one stone by closing the FSC.

Why did the FSC come to this?

The Financial Supervision Commission fell victim to the traditional trap of a body that had become powerful and financially emancipated being completely politicized. Despite the numerous criticisms of the previous chairmen Apostolov and Mavrodiev, under their leadership the FSC gradually gained strength and gained real institutional authority to regulate the financial markets and their participants (whether it did well or badly in this, we will not discuss in this article). Seeing this, politicians logically attacked the commission and took it over completely. After Mavrodiev's resignation, the parliament went through a humiliating procedure for selecting the new leadership. GERB once again bet on a loyal cadre for chairman and entrusted the leadership to Deputy Minister of Finance Karina Karaivanova.

The deputies she proposed, however, were criticized by the United Patriots and the MRF. In the re-voting, Karaivanova proposed party candidates without visible experience and skills in the relevant sectors. The election went smoothly. Thus, only Ralitsa Again remains with experience in her departmental work at the FSC. After the scandal with Olympic, she was also removed after political pressure on the supposedly independent institution. Without commenting on whether Again is to blame for the bankruptcy of the insurance company or not, the fact that she succumbed to political pressure in less than 24 hours and that Chairman Karaivanova completely sided with the executive branch against her own deputy and the supposedly independent institution she headed, clearly shows the total politicization of the FSC.

Totally politicized regulators are unnecessary and harmful…

As we discussed in the previous article, the complete politicization of supposedly independent regulators ultimately degenerates into their inability to do their job, even when there is no political pressure on them. After the decisions taken under political pressure and unfounded by methodology and law regarding CEZ and Nova Televizija, the CPC today finds itself de facto obliged to stop the merger of DSK and Societe Generale Expressbank without issuing regulations to reformat the deal so that it complies with the law (after the merger, a dominant position is formed in consumer loans). If the CPC takes a more liberal approach and allows the merger on the edge of the law or tries to chart a path for this case through regulations, then CEZ, EVN, Energo-pro and Kellner will crush the state in the arbitration courts for double standards. And rightly so.

The complete politicization of the FSC leads and will lead to exactly the same thing. As information is already starting to emerge, Ralitsa Again has proposed severe measures not only against Olympic, but also against at least two other troubled insurers, which obviously enjoy political support. The politicization of the commission, however, has thwarted and continues to thwart any attempt at an active policy by the FSC in this direction. After the full coverage of the crisis, against the background of such inaction and abdication from power, even subsequent correct measures will look like racketeering and a crackdown on companies without a political umbrella. Which leads not only to paralysis or a cascade of scandals at the local and European level and arbitrations against Bulgaria.

… in the case of the Financial Services Commission, politicization is also dangerous for the politicians themselves

In the case of the FSC, however, paralysis will lead not only to an inability to react to the law even in normal situations where there is no political pressure, but also to a real hypothesis that the government will fall on the merits of the commission in 2019. At that time, Bulgaria is expected to complete the assessment of the assets of its banking and non-banking sectors, which will serve as a basis for analyzing our readiness to enter the waiting room for the Eurozone.

The FSC is responsible for the non-banking sector. Although its leadership certainly has a great desire to perform at a high level, the problems with political scandals and the lack of experience in the relevant sectors make the task of successfully conducting the tests almost impossible. It should not be forgotten that the European supervisory authorities come for these tests with the implicit goal of failing Bulgaria's membership in the waiting room - even the blind and deaf understood that Europe does not want us there at this stage. In other words, this is by definition an almost impossible mission, which the FSC, mired in political disputes and dependencies and drained of experience, has almost no prospect of successfully completing.

And the failure of the Financial Supervision Commission and our non-banking sector also means the failure of the Eurozone candidacy, raised as a national cause today. The path between this failure and the resignation of the cabinet is too short.

We should not forget the danger that the gap of between 100 million and 1.1 billion leva in insurance could grow into a series of bankruptcies in front of the helpless FSC, leaving hundreds of thousands of people without insurance, unleashing mass discontent and protests. The path between this failure and resignation is short.

The solution – to close the FSC and transfer its functions to the BNB

We often call for the closure of state bodies and companies, although we realize the political impossibility of these proposals. However, the closure of the Financial Supervision Commission as a way out of the current crisis is not only useful, but will also meet with broad political support in Bulgaria and Europe.

Firstly, because in half of the European Union, the supervision of the financial sector is exactly like that – one institution is responsible for everything. We can cite Hungary (Hungarian National Bank), Ireland (Central Bank of Ireland), Slovakia (National Bank), Lithuania (Central Bank of Lithuania), Denmark (Danish Financial Supervision Authority), Finland (Finnish Financial Supervision Authority), also Latvia, Luxembourg, Sweden, Malta and others. Even Germany, where BaFin has concentrated far more powers over the entire financial and banking sector than the Bundesbank (rather a small partner in peripheral supervisory functions).

Secondly, because the BNB is the only theoretically independent body that has managed to be relatively independent in practice for 28 years. Even now, the BNB governor is a candidate de facto proposed by an opposition economic and political force. There have never been any solid accusations of political dependence against the most influential deputy governor, Kalin Hristov.

Third, because the BNB has undisputed expertise in financial supervision. Although our central bank has received much deserved and undeserved criticism over the bankruptcy of CorpBank, it was not the initiator of the attack on the bank. Yes, the BNB's guilt is undeniable in the abdication of active management of the CorpBank crisis and the opportunities for the bank to be saved or nationalized in order to avoid a similar (political, not market) bankruptcy. But the BNB's merits in isolating the Bulgarian banking sector from the financial crisis in 2009, the Greek crisis of 2010-2011 and the Turkish crisis of 2018 are also undeniable.

Fourth, because our small non-bank financial markets simply do not need a separate regulator. The Bulgarian Stock Exchange has a smaller turnover than Rakovska's Lidl. Our pension funds are still thriving. And they are too tasty a morsel to be left without the necessary independent protection - both from local and foreign appetites (which not only exist, but also manifested themselves a year ago, but behind the scenes). An entire separate commission with an administration and bosses with salaries of 20,000 leva each is simply not worth it. And the absurdity is that being separate, even with so much money and power, it still turns out to have insufficient capacity and expertise.

Fifth, because business will welcome it. Over the past year and a half, the FSC has become self-sustaining, i.e. the supervised entities pay the commission to supervise them. Much can be said about the methodology and the amount of the fees, but in short, they can be described as scandalous. Business will certainly welcome the closure of the FSC and the transfer of responsibilities to the BNB.

Sixth, because this will be the first action in immemorial times to actually reduce and ease the Bulgarian administration. Politicians of all stripes talk about reducing the burden on business and shrinking the state apparatus, but both are constantly growing. The immediate solution to any problem is nationalization, the creation of a new state body or company, the strengthening of state control, i.e. more officials and loyal party functionaries. To close such a landmark commission as the Financial Services Commission, and to the thunderous applause of business, voters and European bodies, will be a historical event with a positive sign.

Image source: Dnevnik.bg

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