Bulgarian banking: looking for sustainability

Abstract

In this work, we trace and analyze the emergence of the crisis in the Bulgarian banking system as well as the behavior of the central bank and other macroeconomic institutions. The average annual rate of growth in the net profits of the commercial banks for the period 2002-2008 amounted to 31.6%, which encouraged and accounted for the increase in credits. After 2008, the pendulum began to swing back as the difficulties in collecting loan repayments increased, the strain in financial balances tightened and assistance and support from the regulators were requested. The level of the financial and operating income was maintained primarily because of the high interest rates on the loans, but the structure of their distribution shifted substantially. Administrative costs and depreciation were nearly frozen up, and impairment and provisions grew at the expense of profit. This work shows that macroeconomic policies allowed the expansion of the lending boom and encouraged its irrational development. Poor operation and poor quality of the institutions not only allowed but also enabled direction of investments to financing of inefficient production structures. Underestimating the negative consequences shoring up a dysfunctional institutional environment is deemed a form of irrationality; however, not one of the immediate economic players acted to override the economic and political environment. The financial and economic crisis currently affecting the country has its roots in the deficiencies of the domestic macroeconomic policies, and therefore, the efforts toward overcoming these failures should be directed at improved domestic macroeconomic management.(This abstract was borrowed from another version of this item.)