Bulgaria Is Letting Bad Banks Fail; Could the U.S. Do the Same?

Source: Thinkstock

Source: Thinkstock

Last week, the Bulgarian government pulled the plug on its forth largest bank after one of the worst financial scandals in the country since the 1990s came to light. The Bulgarian central bank, after making attempts to rescue Corporate Commercial Bank, found that it was not feasible to save the bank and it was setting a wrong precedent for the future, apart from hurting the economy directly.

Last month, Bulgarian depositors made a run on the bank as reports of illegitimate deals struck between the bank and one of its largest shareholders, Tzvetan Vassilev, surfaced. In the audit review of the Corporate Commercial Bank, Bulgarian central bank found out that all the documentation backing loans worth 3.5 billion levs ($2.43 billion) out of CCB’s total 5.4-billion-lev loan portfolio were missing, according to a Reuters report. The documentation is believed to have been destroyed a day before the central bank took over the bank’s operations on Vassilev’s order.

“We cannot continue to fill a barrel without a bottom, as the wise Bulgarian people say, and we cannot nationalize Corporate Commercial Bank in its current state, as we announced before the results of the audit,” the Bulgarian central bank said. “The results of the review of Corporate Commercial Bank speaks, to put it mildly, about actions incompatible with the law and good banking practices,” the central bank said.

The Bulgarian central bank, before the audit, tried to reach out to other prominent shareholders to see if a rescue plan could be worked out after bank run led to one fifth of deposits being withdrawn in a span of couple of days. After these attempts failed, Plan B was to nationalize the bank by getting two institutions to recapitalize CCB. But the audit reports suggested, that was not feasible either. The decision was made to let the bank fail.