UPDATE 1-Bulgaria asks ECB to supervise its banks

Mon Jul 14, 2014 1:40pm EDT

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By Tsvetelia Tsolova

SOFIA, July 14 (Reuters) - Bulgaria will seek European supervision for its banks, President Rosen Plevneliev said on Monday after the country's fourth biggest lender was caught up in a financial scandal.

Bulgaria would be the first country outside the 18-nation euro zone to join the European Single Supervisory Mechanism, set up in response to the global financial and euro zone debt crises.

Plevneliev said Bulgaria's central bank would also submit itself to a peer review from the European Banking Authority.

This is the first time that Bulgaria has signalled its intention to join the European supervision scheme. A banking crisis sparked runs on two lenders in June.

Bulgaria's central bank announced on Friday it would let Corporate Commercial Bank (Corpbank) collapse but make sure that customers do not lose out in the wake of Bulgaria's worst financial scandal since a domestic banking crisis in 1996-1997.

A run on Corpbank last month was prompted by media reports accusing top shareholder Tsvetan Vassilev of shady business deals. It spread quickly to another lender, forcing Sofia to set up a protective $2.3 billion credit line for its banks - a reminder that parts of Europe's financial system are still far from secure. Vassilev has denied the allegations against him.

"The big news from today's consultations - it is positive for all of us," Plevneliev said in a televised statement.

Even though Corpbank is being allowed to collapse, it will need a state-funded bailout to protect the lender's depositors.

"We have a full consensus to immediately start the procedure for Bulgaria's entry into the Single Supervisory Mechanism of the European Union. This is the first step of Bulgaria's accession to the EU's banking union," the president said.

The European Central Bank (ECB) is responsible for the single supervisory mechanism and will take up these powers on Nov. 4. The ECB was not immediately available for comment.

Other EU countries were always encouraged to join the single supervisory regime, but were reluctant because its board will be subservient to that of the ECB, which can only draw representatives from the euro zone.

The single supervisor is carrying out the asset quality review that will determine if 128 of the euro zone's largest banks need more capital, and will also be responsible for the direct supervision of those banks as well as the indirect supervision of about 3,400 more. This supervision will include regular tests of whether the banks have enough capital.

Plevneliev said Bulgaria's politicians parties had also agreed to allow the government to widen the fiscal deficit, possibly by up to 3 percent of gross domestic product against a planned target for 2014 of 1.8 percent.

Bulgarian officials had initially said that depositors would not lose any money following the run on Corpbank. However, the president said on Monday that the state had the means to protect depositors of up to 100,000 euros ($136,000), making it unclear whether they would receive the full amount.

He said the political parties failed to agree on the proposed plan to restructure Corpbank and that the central bank will have to come up with concrete datelines and details in the next days. ($1 = 0.7331 Euros) (Additional reporting by Laura Noonan in London; Writing by Matthias Williams; Editing by Ruth Pitchford)

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