This document summarizes a research project analyzing the correlation between market power and profitability of banks in Bulgaria from 2004-2014. It finds that during the crisis, profitability was replaced by market power as the main determinant of bank strategy. Only the top two banks were able to sustain absolute profit levels, contributing 63-71% of total industry profits from 2012-2014. The crisis highlighted formation of a Bulgarian economic and banking elite, as local managers understood political and economic stories and adjusted policies accordingly. The research concludes that high market concentration allows banks to make profits by setting higher prices, and that political will and judicial quality are important for minimizing corporate crime effects on the economy.

1. MARKET POWER,
PROFITABILITY AND
RISING CONSOLIDATION OF THE
BANKING INDUSTRY IN
BULGARIA
BOJIDAR ARCHINKOV, PHD, MBA
PROF. STOYAN DENCHEV, DSC
UNI BIT UNIVERSITY, SOFIA

2. INTRODUCTION
First post-communist crisis in Bulgaria 1996/97, caused 19 bank
failures, banks shrank from 82 to 35.
Currency board successfully adopted, pegged BGN/EUR.
Bulgarian taxation neared Cyprus, having corporate tax reduced to
15% in 2006 and further to 10% in 2007.
Personal income tax rate came to a 10% flat rate, effective from
January, 2008.
Price instabilities cause difficulties to assess correct asset values:
Market prices of dwellings in Sofia flew from 350 (2002) via 1700
(2008) and dropped back to 700 in 2014 all in €/sq.m.
Local banking industry grew from 12.5 B (2004), to 43.8 B (2013)
and only slight decline to 43.5 B (2014) all in €.

3. A TROUBLE EXPLODED
SUDDENLY!
June 18, 2014 media announced that the Deputy Governor of the
Bulgarian National Bank (BNB, the central bank), in charge of
Banks’ Supervision, is being investigated by the public
prosecution for criminal abuse of power as related to default
loans in CCB.
The panic started and people run to withdraw their deposits!
June 20, 2014 at 11.40 a.m., BNB received a written notice that
the liquidity of Corporate Commercial Bank (CCB) depleted and
the bank suspended making payments.
Corporate Commercial Bank (CCB) has been placed under
conservatorship and the same measure applied to its subsidiary
Commercial Bank Victoria (CBV, former Crédit Agricole Bulgaria).
Depositors withdraw Euro 400 million in cash just on Friday,
June 27, 2014 from another, even “bigger” Bank.

4. RESEARCH PROJECT
Objective - to analyze correlation between market power and
profit generated by banks under local use and control, compared
to banks having roots in Continental Europe (CEU) and Greek
banks present on the Bulgarian market for period 2004 – 2014.
Questions - profit makes banks “excellent”, but is it enough?
What should be a bank’s strategy, given risks of judiciary,
prosecution and/or political interventions.
Methodology – to present dynamics in banking industry,
examining strategic choice in four bank groups, given none
common understanding, neither formulated, nor executable
bailout policies on place.
The uniqueness of the research is to examine political risks,
decisions on bank supervision and economic imbalances, during
the process of possible formation of banking oligopoly!

5. TRANSMISSION MECHANISM
BANK SMEs
Interest rates
Price
developments
Profit Profit
Loss Loss

6. PROFIT-SEEKING BEHAVIOR
A statement of a reputable banker:
“We are willing to provide loans, but we cannot
find creditworthy borrowers!”
Then Noam Chomsky would reply:
“The debt is a social and ideological construct,
not a simple economic fact! … liberalization of
capital flow serves as a powerful weapon against
social justice and democracy. Recent policy
decisions are choices by the powerful, based on
perceived self-interest, not mysterious "economic
laws."!” (Chomsky, “Jubilee 2000”).

7. DYNAMICS IN MARKET POWER
0
5000000
10000000
15000000
20000000
25000000
30000000
2004 2006 2008 2010 2012 2013 2014
Top two CEU without top two Greek ownership BG use and control

8. DYNAMICS IN NET RESULTS
Top two CEU without top two Greek ownership BG use and control
-100000
0
100000
200000
300000
400000
500000
600000
2004 2006 2008 2010 2012 2013 2014

9. CRISIS EFFECT
Correlations between
Net Results
and Total Assets
Prior the
crisis Crisis Total period
2004 - 2010 2012 - 2014 2004 - 2014
Top two banks 0.75 0.99 0.79
Continental Europe without
top two banks 0.45 0.49 0.14
Greek ownership 0.33 0.99 - 0.11
Banks with use and control
linked to Bulgaria 0.99 0.81 0.14
TOTAL Banking System 0.55 0.43 0.15

10. RESEARCH CONCLUSIONS
Profit objectives are one of the main characteristics forming an
excellent bank.
Profitability was replaced by market power as the main
determinant of bank strategic actions during the crisis.
Only top two banks were able to sustain the absolute numbers
of their profit, this make them contribute from 71% to 63% of the
entire profit in the system from 2012 till 2014.
Most likely priorities stipulated by the owners of banks under
Bulgarian use and control blunted competitive forces in their
banks and weakened the link between performance and growth.
CCB’s development acknowledges formation of the Bulgarian
economic and banking elite. Local managers know the stories
and accordingly adjust policies.

11. GENERAL CONCLUSIONS
To minimize the effects of corporate crime on the economy,
managers, prosecutors and governmental authorities should
pay extra attention to fast growing banks, creative methods
for capital increases and lucrative revenue schemes.
Political discussions about “Who is guilty?”, frequently stay
distant from the legal actions, especially having substandard
quality of the judicial system.
Is it any doubt that a decision for bank closure serves
borrowers not to repay their debts and potentially it is still
more fueling corruption?
Environmental factors and especially the high level of market
concentration facilitates banks making profit by setting
higher prices to customers.
What has happened in Bulgaria, it has happened in Europe …

12. THANK YOU!
Bojidar Archinkov
bojidar@dir.bg .
www.pravitel.org