The Bulgarian banking system, on the brink of chaos

Yesterday, upon Bulgaria's request the EC has approved a line of credit of 3.3 billion leva (2.3 billion Euros) for supporting banks that are faced with a speculative attack, Reuters writes.

However, this doesn't seem to have stopped the wave of withdrawals of the deposits opened with First Investment Bank, a bank which many people were encouraged through emails and SMS messages to take their savings out of, the news agency reports.

"The European Commission has decided that the state aid implied by ensuring a credit line is in proportion and in line with the need to ensure sufficient liquidity in the banking system under special circumstances", the EC statement says.

For reasons of precaution, Bulgaria has taken measures to increase the liquidity levels and to protect its financial system, the Commission says.

The actions in force of the Bulgarian and European authorities are necessary, because the situations where information that certain banks are in trouble appears can escalate very quickly, economic analyst Aurelian Dochia writes.

"In cases like these, it doesn't even matter what the truth is, or if the banks in question are really in trouble or not, as people are acting driven by the fear that they could lose their savings", he explained.

Deposit withdrawals from deposits can be dangerous, regardless of how liquid the banks who are the target of those actions may be, Aurelian Dochia warns.

"There is no country can withstand the bank panic. Regardless of how liquid a country's banks may be, there is a limit beyond which they can no longer deal with short term withdrawals. As a bank you can deal with medium and short term withdrawals, but not with short term ones", the economist also said.

The authorities in Sofia called upon their citizens last week not to panic and withdraw their savings once the banks reopen, after the difficulties that two major banks are faced with have increased the concerns about Bulgaria's financial stability.

"There are no reasons to give in to panic. This is not a banking crisis, it is a confidence crisis and a criminal attack", Bulgarian president Rosen Plevneliev said on Sunday.

Last month, the Central Bank of Bulgaria decided to intervene and temporarily take control at Corpbank, the fourth largest bank in the country, and announced that it would begin talks with the current shareholders about supporting the institution. Also, the Bulgarian minister of Finance warned that by July 21st he would nationalize Corpbank, if the talks with the shareholders about saving the bank failed.

On Friday, Bulgaria's central bank denounced "an attempt to destabilize the state" through an attack on the banking system, after the sending of Internet messages claiming that First Investment Bank (FIB), the third largest bank in the country was facing financial difficulties. The sending of these messages, through the internet and mobile phones, determined several customers to request the withdrawal of money from the banks.

• The authorities in Sofia complain about "organized attacks" on the banking system

On Sunday, the Bulgarian police arrested five men suspected of an organized attack organized against the country's financial system, as the government in Sofia is trying to end the biggest bank run in the last 17 years, Novinite reports.

Four men have been arrested in Sofia, and another in Ruse, under suspicion of having disseminated false, ill-intentioned information rumors concerning banks, in order to destabilize the banking system, the State Agency for National Security (DANS) announced on Sunday.

The arrested men used cellphones, e-mail messages and messages sent on social networks, including Facebook and YouTube, to spread rumors intended to make people withdraw their money from banks. According to the agency, some of those men owed large amounts of money to banks.

The governor of the central bank, Ivan Iskrov, said on Friday that the financial sector was the target of an attack organized through anonymous SMSs and email messages, which threatens national security.

First Investment Bank, the third largest bank in Bulgaria in terms of assets, was the target of some "epidemic rumors and public defamatory statements", said Iskrov.

On Friday, First Investment paid its customers 800 million leva (558 million Euros), the bank announced, and said that it has sufficient funds to cover demand.

Internal affairs minister Tsvetlin Yovchev, chief prosecutor Sotir Tsatsarov and the president of the State Agency for national Security (DANS) Vladimir Pisanchev on Sunday had an emergency meeting at the headquarters of DANS to talk about the attempts to destabilize the Bulgarian banking system.

The ongoing investigation also concerns actions directed at Corporate Commercial Bank (KTB), which have forced the National Bank of Bulgaria to place it under special supervision, after its liquidity was depleted.

Meanwhile, the DANS has set up phone numbers for those who receive SMSs or e-mail messages containing negative information about banks.

Last week, the activities of KTB were suspended, and the institution has requested and was placed under the special oversight of the National Bank of Bulgaria (BNB), following a scandal focusing on the deputy governor of the central bank, Tsvetan Gounev.

KTB was among the banks with a high level of liquidity before a rumor about "the dependence of the vice-governor of the National Bank of Bulgaria Tsvetan Gounev on a certain bank", referring to KTB, was broadcasted through an anonymous email by an alleged employee of the central bank.

The rumor coincided with the launching of the preliminary trial procedures against Gounev and led to the withdrawal of huge amounts of money from KTB by customers, which led to it being unable to fulfill its obligations.

KTB will be under special supervision for three months, during which time all its operations will be frozen.