Bank Account Holders in Bulgaria: Protect Your Account Balance and Qualify for Deposit Insurance Repayment When Banks Fail or Stop
Bulgaria is one of the 27 member states of the European Union. The country is located in Southeast Europe and is part of the Balkan area. The free market economy contains a large private sector. This private sector grew exponentially in the late nineties due to foreign direct investment and privatization of Bulgarian state owned companies. At the heart of the domestic economy and the services sector lies the financial industry. 24 banks, of which 6 are branches of foreign banks operate in the country. The market share of foreign owned banks and subsidiaries accounts for almost three-fourths of the banking sector.
The Bulgarian Financial Sector
Bulgarian banks are well capitalized and have strong liquidity and capital buffers. Several vulnerabilities, however, exist in the financial system. These include an overall decline in bank profitability, above average loan defaults, and a rather theoretical yet comprehensive regulatory resolution toolkit for crisis management and intervention in financial institutions in distress. Noteworthy is that public confidence in the financial sector diminished after the closure of one of the largest banks due to fraud and insider abuse in 2014 and bank runs at Credit Agricole Bulgaria and First Investment Bank.
Ongoing measures are taken to protect and maintain financial stability. Challenger banks and other Fintech firms disrupt the traditional payment systems in speed and efficiency. However, the lack of physical branches is challenging for account holders whose business profile falls outside the parameters of a standard transactions. Credit portfolios contain non-performing loans. Despite portfolio sales, extra capital provision, and improvements in the quality of loan portfolios, Non-Performing Exposures remain high.
In the wake of the closure of the Corporate Commercial Bank and the earlier mentioned bank runs in 2014, several shortcomings in the regulatory and resolution framework were revealed. The financial sector in Bulgaria became subject to the European Single Resolution Mechanism (SRM) and the Bank Recovery and Resolution Directive (BRRD). Since the end of the year 2020, the European Central Bank supervises the largest Bulgarian banks. Less significant financial institutions and smaller local banks are subject to national law where the termination of a banking license may require court intervention or ECB approval.
Lessons from the Past
Financial sector resilience and crisis management are critical components to public confidence in the financial system. Repayment of account balances and other investments is a main concern for creditors. The Central Bank (BNB) therefore took several measures to improve sector wide stability. The participation in the European Banking Union and the transfer of supervisory powers to the ECB improved integrity, transparency and good governance. Meanwhile, asset quality reviews in loan portfolios and consecutive action by the banks led to higher profitability. The Bulgarian Deposit Insurance Fund (BDIF) was upgraded and currently holds around 1.2 Billion Bulgarian Lev (600 million euro) in reserves available for future distribution to eligible creditors in Bulgarian bank failures. The BDIF is funded by its members and may require extraordinary contributions from these very members when a payout event occurs.
Deposit Protection in Bulgaria
Bank deposit protection in Bulgaria secures account balances per depositor, per bank. The scheme applies to supervised deposit taking credit institutions with a mandate to perform banking activities from the Bulgarian National Bank (BNB). A requisite for the activation of the scheme is that bank deposits become unavailable when these are claimed and due but have not been paid by the bank as per the applicable legal or contractual provisions. Such unavailability may be the result of judicial action against the bank or the withdrawal of the banking license.
The BDIF is based on the European framework on deposit guarantee schemes (2014/49/EU). The recast directive aims to increase the stability of the European banking and payment system by protecting insured deposits of eligible creditors. Such protection is carried out by the repayment of insured deposits after insolvency or failure of a supervised credit institution. Harmonization of deposit insurance programs throughout the EU requires certain objectives to be met. Sovereign member states define the procedures of their respective schemes. The following characteristics apply to the BDIF:
- Bulgarian bank deposit protection: Maximized at 196.000 Bulgarian Lev (100.000 Euro) paid in local currency – irrespective of the currency of the account – to eligible creditors.
- Covered deposits: Account balances held by physical persons and legal entities at BDIF member institutions operating under a mandate of the BNB.
- Excluded deposits: Deposits connected to money laundering and terrorism financing detected by an effective sentence, accounts of which the holder has not and cannot be identified, accounts with a balance below 20 Bulgarian Lev and accounts without any dispositive actions for a period of 24 months.
- Ineligible account holders: Public entities, financial institutions, pension funds and other investment firms, pursuant to the definitions laid down in directive 2014/49/EU, its predecessors and references.
- Temporarily high deposits: Additional protection exists for a timeframe of up to three months in the amount of 250.000 Bulgarian Lev (127.823 Euro). Such compensation is limited to deposits resulting from real estate deals for residential purposes, payments related to conclusion or dissolution of marriage, termination of a labor contract or civil service contract, disability or death; insurance or social insurance payments or from payment of compensation for damages from crimes or reversed sentence.
- Claim submission procedure: The BDIF scheme is activated when account balances at a BDIF member become unavailable and is open for a period of five years. The BDIF and BNB appoint a local servicing bank to verify and process the DGS claims. Claims must be filed in person or by proxy. Valid proxies hold a notarized and verified power of attorney and further instructions from the account holder. Claimants, both in person and by proxy must submit original claim evidence and a payment instruction.
- Claim verification and repayment: The servicing bank verifies the credentials and claim eligibility of the claimant and repays the insured account balance by bank transfer to the account of the claimant at a local BDIF member. Claimants with a personal account may also request repayment in cash. Ineligible claims and those filed outside of the parameters of the BDIF framework may be rejected.
Recovery of High and Excluded Account Balances or Rejected DGS Claims
Due to its relevance to society, financial institutions and their customers are well protected via a combination of internal capital requirements, regulation and supervision, and consumer protection frameworks. The failure of a financial institution is uncommon and often unexpected by its stakeholders and society. To maintain public confidence, mitigate overall risk, and reimburse eligible account holders, bank deposit insurance programs provide swift access to at least some of the deposits held with failed financial institutions.
Initial relief for depositors of failing financial institutions is provided by deposit insurance. Such a first line of defense for creditors allow lawmakers to select and execute the appropriate resolution plan. Not all account balances are protected by the BDIF and some accounts hold balances that exceed the maximum DGS coverage. The strongest position for post-hoc reimbursement are creditors holding specific privileges and collaterals. This requires a securitized agreement with the bank that was concluded prior to the closure of the bank. The Bulgarian Law on Bank Bankruptcy prohibits and thus stays all legal action against the bank to secure an individual priority position and invalidates specific administrative setoff actions. Consequently, only claims that have arisen before the date of the bankruptcy proceedings have opened are valid. Individual creditors may ask the court to overrule the Law on Bank Bankruptcy with weighty yet indiscriminately objectives.
Most DGS claims are filed correctly, by eligible creditors who are entitled to receive their compensation within the defined parameters and timeframes of the scheme. However, several claims lack the needed substance or are ineligible and thus rejected. Such claim rejections are often fueled by emotional responses of claimants who feel their rights are infringed and may be the result of a legitimate lack of procedural understanding. Claimants whose DGS claim is rejected may request the BDIF to reinspect their case. Tangible evidence of eligibility is necessary to overturn the earlier decision. When the earlier decision is upheld and the BDIF remains at its position to reject the claim, the claimant may take their case to the civil court. Similar approaches apply to out of court and pre-trial arrangements, and bankruptcy and liquidation procedures. Fairness and equal distribution of assets to unsecured creditors must be warranted and therefore individual claims who seek to prioritize their claim must provide the court with sufficient reasons to set aside such principles.
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This website is an initiative of Legal Floris LLC. Since more than a decade, we have helped international creditors recover money when their bank fails or their investments disappear. Due to our vast experience in dozens of bank failures in different countries, we are able to maximize repayments and minimize risks for our clients. Contact us right now to find out how we can help you too to reclaim your account balance:
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