Bulgaria’s Bank Runs: The Europe Commission Rides to the Rescue

With stock markets on a bullish shindig, the idea of financial instability has almost been out of the picture. But wait, one of Europe’s poorest countries just suffered TWO bank runs on "two of the country's biggest lenders" that has prompted the European Commission (EC) to ride to the rescue. 

From the Financial Times:

Bulgaria’s banking system appeared to be stabilising late on Monday after the EU approved a Lev3.3bn (€1.7bn) emergency credit line from the central bank, following runs on two of the country’s biggest lenders in a week.

The public as scapegoats…

The Bulgarian National Bank had warned on Friday of an “attempt to destabilise the state through an organised attack against Bulgarian banks”, as Bulgarians withdrew Lev800m from branches of First Investment Bank, the country’s third-biggest lender.

Those withdrawals came just days after a run on Corporate Commercial Bank, the country’s fourth largest bank.

Six people were arrested over the weekend, accused of sending electronic warnings that FIB was about to collapse; two were indicted on Monday for spreading false information on banks.

Oops, but there is a political dimension… (bold mine)

Rosen Plevneliev, Bulgaria’s president, also announced late on Sunday that after talks with party leaders he would dissolve parliament by July 25 and then name a caretaker administration, ahead of early elections called for October 5. That move helped ease political uncertainty that had fuelled the crisis…

Despite strong fiscal management and a stable exchange rate backed by a currency board arrangement pegging the lev to the euro, Bulgaria is criticised by EU partners for weak governance resulting from close ties between business, politicians and the judiciary.

Corpbank reportedly will be nationalized.

Why would a truly sound banking system be subject to destabilization by merely false information?

The dean of the Austrian school of economics Murray N. Rothbard explains

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding...

This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided.

So all it takes is for political uncertainty to surface to expose on the shroud of tenuous confidence from a fractional banking system which has been blamed on to the public.

The bailout means resources from European taxpayers will be used as subsidy to Bulgarian banks.

Yet with almost every nation engaged in their homegrown variety of bubbles, it is just a wonder what would happen if today’s colossal imbalances unravels? Will there be massive bank runs in many countries simultaneously? If so, does the respective governments have resources to bail them out? If not, will multilateral institutions also have resources for these rescues? Or will there be a massive recourse to save banks via deposit levies?