EKIP– Expert Club for Economics and Politics A Different Opinion
October 1 marked exactly one year since Bulgaria officially joined the EU Banking Union. The accession was accompanied by great fanfare from public experts, politicians, and of course the government of Boyko Borissov himself, who in April 2020 declared Bulgaria’s accession to the ERM-II exchange rate mechanism and the Banking Union a national priority within the same year. The Prime Minister himself had been assuring Bulgarian citizens for months that joining this union “guarantees the stability and control of all Bulgarian banks.”
However, very little is known about the real structure and history of the Banking Union among Bulgarian society. The reason for this is that, as with the Eurozone itself, Bulgarian politicians do not lift a finger to explain how this union works and what consequences it may have for our banking system. It is to this question that I have dedicated the latest study for EKIP “One Year in the Banking Union – What Does This Mean for Bulgaria?”.
As a structure, the main thing to know about the Banking Union is that it is composed of three key units. The central role is played by the European Central Bank, which is the ultimate supervisory institution for all banks located in the member states of the Banking Union. All national banks, including the BNB, are fully subordinate to the ECB and must follow it in their supervisory practice. This forms the so-called "Single Supervisory Mechanism".
Then there is the “Single Resolution Mechanism”. A centralised mechanism in which a “Single Resolution Fund” finances the possible restructuring of banks in the event of problems with their financial situation. This fund is replenished with contributions from all banks within the union. Whether this mechanism comes into use and accordingly whether a bank is subject to restructuring is decided by the “Single Resolution Board”. This decision of the terroir is based mainly on two key criteria. First, whether a possible liquidation (bankruptcy) of the bank would disrupt functions of critical importance for the economy and secondly whether the stability of the banking system of the respective country would be threatened. This is the structure and theory of the work of the Banking Union. Let us now turn to the practice, as seen from its history.
Contrary to the assurances of former Prime Minister Borisov, the history of the Banking Union so far shows that neither stability nor control is guaranteed for the banks that enter its borders. Several examples can serve as an illustration of this. Perhaps the most famous of them is the case of the Latvian bank ABLV, which as the third largest bank in Latvia went bankrupt in early 2018. The bank slid down the slide towards bankruptcy after the US authorities imposed sanctions on it after accusing it of money laundering.
The revelations turned into a public scandal that caused a huge capital outflow and destabilized ABLV's financial situation. Meanwhile, the supervisory institutions of the Banking Union itself and the European Central Bank itself seemed to know nothing about the matter. Their involvement was limited to refusing to provide assistance to a bank accused of criminal activity and ruling that ABLV should be allowed to fail. An eloquent illustration of the quality of supervision exercised by the Banking Union.
However, this is far from the only such case. In March 2020, Anglo Austrian Bank in Austria declared bankruptcy after a few months earlier, in November 2019, the European Central Bank revoked its license in connection with money laundering revelations. Alas, the revelations were not the result of the insightful work of the supervisory institutions of the Banking Union, but of an investigation by Austrian and Lithuanian journalists. The union’s control has disappointed once again.
In this regard, Bulgaria's experience in the Banking Union is also indicative, no matter how modest it may be within the framework of only one year. When the scandals related to the Bulgarian Development Bank escalated in the spring of 2021, especially in connection with the actions of the then caretaker minister Kiril Petkov, we from the EKIP were in correspondence with the ECB. In the framework of this correspondence, it became clear that the ECB and the other institutions of the Banking Union are actually not at all aware of the suspicions of serious abuse of power in the BDB and the years of investigations and reports on the topic. And only as a result of the actions of the caretaker cabinet, did the ECB think of showing more interest in the topic.
But beyond weak supervision, the Banking Union also faces more serious structural problems that carry with them serious risks for countries like Bulgaria. The current governor of the Bulgarian National Bank, Dimitar Radev, warned about such a risk back in 2015 during his parliamentary hearing, when he was still only a candidate for the position. At that time, he correctly pointed out that the way the Banking Union integrates the banking systems of countries like Bulgaria within a common banking market, with a common regulatory framework, creates incentives for capital outflows.
Banks in Bulgaria, which were previously subsidiaries of foreign banks after joining the union, can be freely transformed into branches, in order to be exempt from the stricter capital requirements of the BNB compared to the rest of the Banking Union. After such a transformation, the foreign banks in question can freely withdraw capital from their branches in Bulgaria. In simple terms, this means an outflow of money that serves as a buffer, which could make the Bulgarian banking system more vulnerable in the event of a crisis. Interestingly, only a few years later, however, as elected governor of the BNB, Dimitar Radev not only does not mention anything about this risk, but is even one of the most ardent defenders of Bulgaria's accession to the Banking Union.
No less worrying is the fact that after joining this union, our country no longer has its own bank resolution fund. Previously, there was one at the BNB, but upon our accession, it merged into the common resolution fund of the Banking Union and future contributions from banks in Bulgaria will now go into it. This is especially problematic considering the fact that in the history of its existence, the Single Resolution Board has repeatedly refused to allocate money from the resolution fund to banks that national governments consider important for the local economy.
An illustrative case is Italy in 2017, when two banks of particular importance to the economy of the northern and richest regions in the country fell into serious trouble. The Italian government believes that they must be restructured to avoid serious consequences for the local economy and population. However, the Single Resolution Board (SRB) has a different opinion and refuses to allocate funds from the Single Resolution Fund. The Italian government is forced to finance the restructuring with funds from the state budget, i.e. with the money of Italian taxpayers, instead of with the money of the banks collected by the Banking Union itself. A curious moment is that the European Commission approves this state aid to the government, even though the Single Resolution Board's assessment is that there is no need for restructuring.
If, God forbid, Bulgaria were to have a problem with one or another bank, the situation would likely develop similarly. Without a resolution fund at the BNB, Bulgarian taxpayers would be the ones directly bearing the cost of rescuing a given bank. From a moral point of view, the way the Banking Union operates in this regard is particularly unfair given the fact that the institution making the decisions is not the one that bears financial responsibility in every situation. The Single Resolution Board decides whether a bank or another will be restructured, but in case of refusal, it bears no consequences. The consequences lie entirely with the local government and Bulgarian taxpayers, who must choose between paying for the restructuring or, in the event of bankruptcy, paying for the deposit guarantee scheme of up to €100,000.
Alas, this shows that the Banking Union suffers from the greatest vice of all the other institutions of the European Union. It concentrates even more power in the hands of supranational bureaucrats, who, however, are not the ones who pay the price for mistakes they may make in exercising this same power. The vicious spiral of increasingly concentrated power and increasingly blurred responsibility in the EU continues to deepen, and Bulgaria is being pushed right into its center due to the sick fixation of Bulgarian politicians on replacing the lev with the euro. The Banking Union is turning out to be not a salvation, but a trap for Bulgarian taxpayers.
The article was originally published in the newspaper "Trud".
