Банкеръ Weekly



By Bulgaria'a accession to the European Union (EU), the clause stipulating that BNB's decisions for revoking licences and imposing restrictive measures on the operation of banks and their managers cannot be litigated in court, will be deleted from the Banking Act. The reason is the philosophy shared in EU countries that nobody can be deprived of court defence against the acts of one institution or another. In mid-November 2005 the BNB already lost in the European Court in Strasbourg the lawsuit, initiated by Angel Parvanov, owner of the bankrupt CAPITALBANK, against the 1998 decision for the revocation of his bank's licence. His claim was honoured with the motive that he was deprived of the right of court defence against BNB's decision which contradicts the European Convention on Human Rights. EU judges did not comment at all if the central bank was right in revoking the licence. However, it's a fact that they honoured the entire amount of Mr. Parvanov's claim - EUR14MN, and also ruled that the Bulgarian State pays him EUR4,000 - the amount of the lawsuit's expenses.
There is no court in Europe that would doubt the decision of the bank supervision in the respective country. Therefore, the issue of defending the central banks' decisions from eventual protests of the injured is not posed in EU countries. At the same time, however, each person's right to be defended at court is not doubted either. That is why the European Court ruled in favour of Mr. Parvanov, Dimiter Ananaiev, head of BNB's Legal department, said to the BANKER weekly.
Principally, the philosophy of guaranteeing everyone
the opportunity for get court defence
is absolutely right, the more so that people - shareholders, managers and personnel - stay behind each bank. These are the citizens with their deposits and corporate managers and owners with their bank accounts. And the main task of bank supervision is to protect the clients' rights and the security of their deposits. For that reason the BNB demands from banks to keep a set capital adequacy, not to allocate loans which individual and total amount exceeds a certain percentage of their equity capital, and to set special provisions on overdue credits. In order to avoid declaring a certain bank insolvent the BNB can appoint to it ombudsmen, forbid it effect certain operations like extending loans, accepting deposits, etc., and even oblige some of its shareholders sell their stocks. Imposing all these measures cannot be litigated in court at present. If that ban did not exist, the owners of banks with problems in Bulgaria would initiate lawsuits and postpone for ever and ever the enforcement of measures, imposed by the BNB. And while proceedings are dragging along banks could be completely drained, which has already happened repeatedly in Bulgaria.
The lack of the opportunity to litigate BNB's decisions
for revocation of licences was included in the Banks Act back in 1998 due to concrete occasions. At that time the shareholders in First Private Bank were for two years at law, protesting BNB's decision as of mid-1996 for closing down the credit institution. In that period the encashing of its assets could not start in order to accumulate money and begin paying to creditors. And the owners of CAPITALBANK and Dobroudjanska Banka instituted proceedings against the revocation of their licences and threatened BNB's Vice Governor Emilia Milanova with an investigation by the Prosecutor's Office. All this forced the central bank's Board of Governors demand from Parliament include a special protective clause in the Banks Act. The presumption was that the court does not have magistrates and experts who are acquainted in detail with the subtleties of bank finances. According to BNB's representatives and experts on assessing the risk in banks
the analysis of the financial situation
of a credit institution is a science in itself. It presupposes not only a good knowledge of effective legislation and regulations in that sphere, but also of the influence of various financial operations - lending, repo deals, cessions, hedging, extending guarantees, taking on a subordinate time debt , etc. With the introduction of the new requirements, known as the Basel Capital Accord II, for assessing not only the credit currency and market risk, but also the much more complex operational risk, what will be needed for analysing the situation of a certain bank will be not only experience and knowledge, but also an expedient software programme for calculating the various stability indices.
However, Bulgarian magistrates have neither experience nor
financial competence
to judge the condition of the crediting institutions and make decisions based on the reports of the experts. For example, just a month ago the Sofia City Court sentenced the BNB to pay BGN13,000 to companies controlled by Ivan Evlogiev for having illegally suspended the licence of Evlogiev's International Bank for Investment and Development (IBID). Let alone the fact that the court permitted consideration of a claim filed by people who were not shareholders of the bank at the time it lost its licence (January 1999)! More curious is an element of the sentence saying that BNB prohibited the IBID from compensating its obligations to the Rado financial and brokerage house from its receivables from companies controlled by Ivan Evlogiev. According to the legal regulations, an operation of the kind may only be fulfilled if the debtor has receivables from the insolvent bank or, as experts put it, if its receivables and obligations are homogeneous. Besides, the magistrates decided in favour of the companies that initiated legal proceedings against BNB, although IBID's capital was negative by the time its licence was suspended. It means that its obligations exceeded the amount of its receivables and in that case the law obliges BNB to suspend its licence.
If the clause saying that BNB's decisions cannot be appealed is eliminated once Bulgaria joins the European Union, the state will obviously have to find other ways to guarantee a quick and impartial legal trial. One way is to provide magistrates who are both legally and financially competent and to entrust the assessments to extremely well prepared experts. In fact, the IMF and the World Bank have long been mentioning in their reports that insolvency cases should be reviewed by specialized courts. The evaluation of banks' financial condition may be entrusted to chartered accountants or auditing companies. They certainly know the methods for assessing crediting institutions, they are able to make a reliable analysis and bribing an auditing company seems much more expensive than bribing a few experts. Anyway, if the legislator fails to provide competent and unprejudiced jurisdiction in the cases of bank insolvency, that will question the efficiency of the whole banking supervision and the safety of the banking system. The deposits of individuals and companies will be exposed to risk, too.

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