One year of Bulgaria in the Banking Union - risks and opportunities

• The Banking Union creates incentives for decapitalization and destabilization of our banking system
• The Banking Union would most likely not help restructure local banks
• Bulgaria no longer has its own bank resolution fund
• In such a situation, the cost of bank bankruptcies falls through the budget onto Bulgarian taxpayers.

On October 1, 2020, Bulgaria officially became part of the European Union's Banking Union as a condition for its eventual accession to the eurozone. What is the balance sheet after one year of membership in the Banking Union?

An in-depth analysis by the TEC examines the structure of the Banking Union, the way Bulgaria fits into it and the possible consequences of this for the Bulgarian banking system. The regulatory framework and historical data on the work of the supervisory institutions of the Banking Union show that membership in it exposes Bulgaria to greater risks for the banking system and the state treasury.

"Joining the Banking Union turns out to be a trap for Bulgarian taxpayers," says Georgi Vuldzhev, author of the analysis.

The EKIP study confirms the thesis expressed by the Governor of the Bulgarian National Bank, Dimitar Radev, in 2015, that membership in the Banking Union in the current context creates incentives for decapitalization of the banking system. There is a strong incentive for banks in Bulgaria that are subsidiaries of foreign banking groups to be converted into branches, in order to be exempt from the stricter capital requirements that the BNB imposes compared to other central banks in the Banking Union. This could lead to capital outflows from our banking system and its financial destabilization.

Secondly, the history of the union so far shows that local, national priorities for financial stability diverge from the assessment of the Banking Union. It is very likely that in a crisis situation the supervisory structures of the Banking Union will refuse to restructure a local bank, which, however, is significant at the local level and is recognized as such by the Bulgarian institutions. This would lead to liquidation and activation of the state deposit guarantee scheme up to 100,000 euros.

Thirdly, the fiscal risk is reinforced by three additional factors. Since joining the Banking Union, Bulgaria no longer has its own bank resolution fund. The BNB is obliged to transfer contributions to it to the general fund of the Banking Union. Thus, in the event of a need for restructuring that is not approved by the supervisory institutions of the union, Bulgaria has no saved funds to use for this purpose. Bulgaria is also not a member of the eurozone and, accordingly, banks in our country do not have access to liquidity support from the European Central Bank. There is also a moral hazard due to the fact that the institution that makes the decision on restructuring (the Single Resolution Board of the Banking Union) is not the one that will pay the fiscal price in the event of liquidation – this would be the Bulgarian state and taxpayers.

You can read the full analysis at this link.

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