Corporate Commercial Bank: No Innocent People || Creative Commons

It has been more than one year following the closure of Corporate Commercial Bank (CCB), but speculations about the reasons for its collapse have continued1.

It is notable that a large number of the versions attempt to place the focus of the topic on one of the parties involved and/or to put the blame on the panic during the days before the bank was subjected to special supervision. These versions try to more or less justify either the method of work of the bank, or the exerted control, while simultaneously blaming the other party in one way or another. At the same time, the simplifying of the CCB case to panic, or to an attack in respect of the bank, contradicts all of the more serious documents concerning the subject – be it the reports of the three auditing companies regarding the bank’s condition, or, for instance, the report of the temporary parliamentary committee scrutinizing the case.

The independent evaluation of the banking supervision effectiveness in Bulgaria prepared by a team from the International Monetary Fund (IMF) and the World Bank (WB), has also been presented recently. The document details the practices in Bulgaria and points out structural weaknesses that are among the drivers behind the CCB case. Despite focusing on the supervisory practices, it also refers to what happened to CCB, for instance, with the following statement: “The CCB collapse revealed supervisory shortcomings particularly for the supervision of concentration risk and related-party lending in the bank.” In this unambiguous way the international institutions consider simultaneously both the bad practices regarding the management of CCB and the weakness of the exerted supervision. In a nutshell—there are no innocent people.

The international institutions’ report is based on the underlying principles of the Basel Committee on Banking Supervision. It shows that 9 criteria, out of 29, have been complied with, 12 have been largely complied with, and 8 have not been complied with. The most serious flaws regarding the supervisory activity are the following:

  • The severe concentration of powers pertaining to the deputy governor responsible for the Banking Supervision,

  • The lack of ability to change shareholders in banks that do not meet certain criteria,

  • The lack of penalties regarding repeating breaches,

  • The financial reporting and the external audit,

  • The corporate management of supervised entities,

  • The risk concentration, the big exposures, and the deals with related parties.

The IMF and the WB also pay attention to the fact that the BNB’s resources are insufficient for the quality performance of its regulatory activities, which negatively impacts the number of staff, its ongoing training and IT skills. Insufficient IT skills and skills pertaining to quantitative methods of analysis have been noted. Similar weaknesses were also observed as a result of the supervisory inspection of the BNB, in which 22 people took part, while the teams, concerning any standard supervisory inspection, normally consist of 3 to 6 people. A number of breaches, which could hardly be discovered during a standard supervisory inspection on site, were found as a result of the deeper analysis.

None of these conclusions, however, change the fact that the CCB management has wrongfully used these flaws while trying to circumvent and violate statutory regulations. The credit exposure to related parties constitutes one of biggest problems in this respect; this exposure was 3.9% of the bank’s capital, reported as at December 31, 2013, and it reached 33.5% in June 2014 based on the auditors’ re-classification of big part of the loans. The IMF and the WB point out in their conclusions that this could be an individual case, but they recommend that the BNB should examine the entire industry in respect of the availability, or lack, of similar malpractices.

Covering the big exposures to related parties, in respect of CCB, has been done via Special Purpose Vehicles (SPV), holding companies and similar entities. Thus, the bank achieved two effects: it concealed its exposures to related parties and artificially maintained the level of non-performing loans of less than 2% of the portfolio.

The brief message of the report regarding the effectiveness of the banking supervision in Bulgaria is unambiguous: yes, the supervision has demonstrated weaknesses, and yes, the CCB management has circumvented and violated the regulations and the good banking practices. This should be the end of the vibrant debate of who is guilty, because it is clear that all of the participants hold their part of the guilt. All public and private institutions should emphasise minimizing the damage arising from the CCB case; all necessary measures should be undertaken in order avoid a new situation like this.

1 See for instance the bank owner’s version, presented before the Forbes’s blog