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THE BULGARIAN BANKING SYSTEM IN 2016: A COSTLY SAFE BOX FOR THE SMALL DEPOSITOR

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The paper provides a quick glance at the developments of the Bulgarian banking sector in 2016, analyzing aggregated data to deduce conclusions regarding the behavior of mass increases in operational taxes that are, respectively, raising the overall prices of bank services for the retail customer, causing small deposits to no longer be viable
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55th Science Conference of Ruse University, Bulgaria, 2016
Copyrights© 2016 ISSN 1311-3321 267
SAT-2G.404-2-EM-08
THE BULGARIAN BANKING SYSTEM IN 2016: A COSTLY
SAFE BOX FOR THE SMALL DEPOSITOR
Elizar Stanev, assistant-prof.
Department of Economics
Faculty of Business and Management
“Angel Kanchev” University of Ruse
E-mail: eastanev@uni-ruse.bg
Abstract: The paper provides a quick glance at the developments of the Bulgarian banking sector in 2016,
analyzing aggregated data to deduce conclusions regarding the behavior of mass increases in operational taxes that
are, respectively, raising the overall prices of bank services for the retail customer, causing small deposits to no
longer be viable
Keywords: Bulgarian banking sector 2016, bank operational taxes, bank operational taxes regulation
JEL: G21, E58
INTRODUCTION
After the active phase of the latest financial crisis the banking system in Bulgaria went
through a lot of turbulent developments from the withdrawal of the banking license of Corporate
Commercial Bank (CCB) and the following turmoil to the stress-tests performed by the Bulgarian
National Bank (BNB) from June to September, 2016. During this time the system displayed
relative stability in an environment of uncertainty and political indecision regarding the integration
of the newly founded European Banking Union. On the other hand, for the current year of 2016
the Bulgarian monetary sector registers unconventional changes in the structure of its income and
expenditures. The current dynamic is becoming a cause of disquietude in small depositors and
concerns for the primary functions of the banking sector are raised among the general public. This
leads to the necessity of a topical analysis of the indicators of the effectiveness of day-to-day
operations and the general behavior of commercial banks during the specified period.
It is important to note that the character of banking activity has an integrated aspect of duality
in It on one hand it serves a vital and fundamental purpose in an economic system; on the other
hand although not as obvious at first glance it does have a certain “social” role to fulfil. Thus,
keeping these points in mind, this paper treats the banking system in Bulgaria as its object of
analysis, and more specifically the dynamics of its income and expenditure accounts, whilst
upholding a hypothesis that small depositors are overburdened with low interest rates on deposits
coupled with relatively high operational fees. The individual approach that commercial banks have
towards the formulation of their operational fees partially obstructs collecting and analyzing such
data, making conclusions based on it unreliable. To avoid this problem we have turned to
aggregated, statistical indicators that can be used as indirect measurements of the specified
phenomena.
EXPOSE
Concerning the methodology of the practical analysis of the gathered data - the following
indicators of efficiency have been calculated for the whole of the Bulgarian banking sector (Table
1).
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Table 1. Indicators used
The distinction between interest-based and non-interest based indicators follows the
theoretical identification of the two types of bank income [4]. The interest-based income and
expenditures are a reflection of the primary functions of commercial banks providing credit and
deposit opportunities. The non-interest based income is realized through dividends, fees,
commissions, deals with securities, currency trade, derivatives, etc. The focus of this paper is on
the significant fragment of non-interest based income represented by income from operational
fees; its other segments are omitted.
In its current state the environment of the banking sector remains tense. In preparation for
the stress-test procedures (in mid-2016) commercial banks consolidated their portfolios, further
limiting their rates of providing loans to private business and households, and this tendency for
passive behavior was simultaneously accompanied by falling deposit interest rates, which have
reached symbolical values as of late (Figure 1).
Figure 1. Effective interest rate on deposits with an agreed maturity of up to 1 year, in BGN;
non-financial enterprises and households. Source: BNB, Monetary statistics [7]
As a result of the low income offered by banks on depositors’ money, following the
fundamental economic laws of supply and demand, the supply of new resources from the
depositors is on a steep decline.
income from interest operations
income from operational fees
expenditure on interest operations
expenditure on operational fees
net income from interest operations net income from fees (income from fees - expenditure on fees)
Volume of deposits with an agreed maturity of up to 1 year, new business
Ratio of net income from operational fees/net income from interest operations
Net interest margin [(income from interest operations - expenditure on interest operations)/assets]
Net interest rate spread towards non-financial enterprises
Net interest rate spread towards households, consumer loans
Net interest rate spread towards households, housing loans
Indicators (Bulgarian banking system)
Interest - based
non-interest based
55th Science Conference of Ruse University, Bulgaria, 2016
Copyrights© 2016 ISSN 1311-3321 269
Excluding the last few months of 2014, the banking sector registers a declining trend in the
volume of newly-attracted deposits (Figure 2). The sudden peak at the end of 2014 can be
attributed to the technical exclusion of CCB’s deposit base from the monetary and interest statistics
of BNB that was performed in November, 2014. The peak itself is a visualization of the following
repayment of the guaranteed deposits (all of those which, individually, amount to 100 000 euro or
less) and their reintroduction back into the system’s deposit base as newly created deposits in
different commercial banks. From the start of 2014 up to July, 2016, the sector registers four times
less in terms of the indicators for new deposits from non-financial enterprises (620 to 152 mln.
BGN) and close to a two-time drop in new deposits from households (704 mln. BGN to 362 mln.
BGN).
Figure 2. Volume of deposits with an agreed maturity of up to 1 year, new business;
mln. BGN.Source: BNB, Monetary statistics [7]
Concerning the synchronization of the financial legislation with that of the European Union
(directive 2014/92/EU), in the period leading up to October 1, 2016, commercial banks are obliged
to present data regarding the level of their fees and commissions to the authorities at the National
Bank. The newly-created register is supposed to go public on the BNB website after a period of
initial data processing (estimated around the end of October, 2016). The goal of the regulator is
to not only provide a basis for comparison to the general public new requirements for lower taxes
for socially-vulnerable individuals are to be instated later on, too [2][8]. The availability of the
reported data will allow for a more direct approach to the monitoring and regulation for the
observation of the good practices of European banking. The BNB position is expressed on their
website stating “Banks are supposed to apply acceptable fees on basic operations with payment
accounts no later than February 1, 2017” [6]. Inevitably, the slowing down of credit activity and
the anticipation of the newly-imposed regulations has led up to the desire of banks to compensate
profit through various maneuvers, mostly concentrated in the increases of fees and commissions
for their retail customers from the real economic sector non-financial enterprises and households.
Individual commercial banks approached this matter in different ways, but the overall tendency
for 2015-2016 has been an overall increase in said fees [1]. Indirectly, this increase can be partially
determined by an analysis of aggregate data containing the income from operational fees and
commissions filed in the reports of the banking system (Figure 3).
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Figure 3. Net income from fees and commissions and net income from interest-based activities,
in absolute values,
in thousand BGN
Source: BNB, Monetary statistics, author’s calculations [7][3]
Compared to the start of the year, in July 2016 the Bulgarian banking system has registered
an increase of 458 mln. BGN in fee and commission income, which represented by its rate of
growth for the period surpasses the rate of increase of income from interest-based operations.
Compared to the same period of 2015 the increase in interest income is 36 mln. BGN more, and
the increase in fee income close to 15 mln. BGN. The percentage rate of the growth of income
from interest-based assets has remained almost constant (603% Æ 602%; lower by 1%) while the
percentage rate of income from fees and commissions has increased by 10% (667% Æ 677%) /on
the basis of January, for the relevant year/. The juxtaposition in terms of a ratio between the two
measurements paints a clear picture for the relatively small period of January to July, 2016, the
fee income has grown with over 3% of interest income and retains a faster rate of growth,
especially considering that interest income is rising in absolute value at the same time.
Table 2 Relative shares of net income from fees and commissions and net income
from interest-based operations to net total operational income, percent
The trend of increasing operational fees and fees connected with the support of savings and
payment accounts (respectively the growth in income of said category in the banking sector
month jan feb mar apr may jun j ul
Net total o perational income
353428 645192 943243 1294280 1575777 2071487
2409915
Net income from fees and commissions/ net total operational income (%
19.14 21.42 22.85 22.46 23.22 21.56 21.82
Net interest income/n et total operational income (%) 66.22 72.24 74.31 72.87 74.58 68.18 68.26
55th Science Conference of Ruse University, Bulgaria, 2016
Copyrights© 2016 ISSN 1311-3321 271
reports) can be classified as “opportunistic” – a response to the upcoming regulatory changes151.
Another explanation of the increase in income from fees and commissions152 is a wider spread of
banking services among the populace a result of newer and better-targeted services that attract
new clients. A notion against such claims is the widespread decline of the volume of newly created
deposits. The belief that banks behaving in such a manner is a result of them operating in a state
of low net interest margin is, also, unfounded (Figure 4).
Figure 4. Net interest margin of the Bulgarian banking system, %
Source: BNB, Monetary statistics, author’s calculations [7][3]
The net interest spread towards household consumer loans mostly remains around the 10%
marker for the observed period. In regards to non-financial enterprises the indicator is confined to
a corridor between 2 and 4% marker, with a declining trend after May, 2016. The dynamics of the
net interest spreads are calculated and presented in Figure 5.
Figure 5. Net interest spreads of the banking system, loans to: non-financial enterprises,
households consumer loans and households housing loans
Source: BNB, Interest rate statistics, author’s calculations [7][3]
Figure 5 clearly entails that the “razor” between the different interest rates is not highly
volatile during the observed period when it comes to household loans, unlike the spread for private
151 The BNB formulates the acceptable level that fees are supposed to have from February 2017 onward based
on a methodology that compiles an average of the current fee rates. Since they have been increased several times prior
to the moment of calculation, their average (the one supposed to serve as a landmark from then on) will also be
inflated, thus officially instating high fees as the norm
152 One regularly quoted in Bulgarian media
jan feb mar apr may jun jul
Net interest margin
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business. As a whole the interest rate spreads remain relatively high for the real economic sector
in Bulgaria, which partially constitutes the low investment activity in a macroeconomic sense.
CONCLUSION
Undoubtedly, the burden of fees and commissions for day-to-day operations falls directly
upon the end-consumer (the retail customer) of banking services. Their raising reflects most
negatively upon the vulnerable segments of the Bulgarian population (e.g. pensioners and elderly,
who traditionally use saving accounts attached to a “savings book” deposits redeemable after
notice for holding smaller sums of money). Due to the current situation there is a real danger that
small-time deposits, despite the generated interest, become a liability instead of an asset for their
owners, as operational fees “eat up” the generated interest. Such instances contradict the
fundamental functions of a banking system to mediate the redistribution of money from points
of surplus to points of deficit. An unofficial “deposit bar” appears to be forming at different levels
at each commercial bank, causing deposits under a certain amount to no longer be viable as means
to accumulate capital. Provided the newly instated regulations do not resolve this conflict, sooner
or later the small depositors will be forced to relocate their savings into alternative options. At the
moment though, a certain paradox is in play the absolute amount of household savings keep on
growing, albeit their rate of growth has slowed down significantly. On top of that, from 2014 up
until now, the individual deposit count has lowered parallel to the falling interest rates, which
constitutes that in the near future we can expect less, but larger deposits ones that can still
generate enough interest to be worth it. In this case the behaviour of non-financial enterprises and
households, especially those who can be classified as small depositors, can be interpreted in
different ways, not all of which are entirely related to rational economic and financial choices
for example, low general financial knowledge (thus low commitment to personal finances, lack
of knowledge), lack of available and accessible alternatives for small sums of money
(underdeveloped financial markets), fear of keeping large sums of money on the territory of one’s
home, work-related (or other kind of) commitment to a certain bank, etc.
Solving this issue in a positive way is reliant on addressing both aspects of the problem- in
a macroeconomic and in a social sense. From the viewpoint of macroeconomics the excess of
liquidity in the banking sector is best tackled with improving the stability of the political and
economic environment, which should provide a long-term rise in demand for credit. The social
aspect of the problem can be tackled through administrative regulation for transparency in banking
activity practices, reductions in fees for socially-vulnerable groups of people and/or exemptions
of fees and commissions for minor deposits (under a certain amount).
REFERENCES
[1] Data on the banking fees from commercial bank websites. Acquired for the largest banks
in Bulgaria (in terms of assets), as classified by the Bulgarian National Bank as of Sept 30, 2015
(bank websites include those of: Unicredit Bulbank, DSK Bank, First Investment Bank, United
Bulgarian Bank, Raiffeisen Bulgaria; last visit: 24.09.2016)
[2] Directive 2014/92/EU, European Parliament:
http://eur-lex.europa.eu/legal-content/BG/TXT/PDF/?uri=CELEX:32014L0092&from=EN, last
visit: 25.09.2016
[3] Income and expenditure reports of the Bulgarian banking system for 2010- 2016, BNB,
Bank monitoring www.bnb.bg , last visit: 24.09.2016
[4] Krystev, B. „Анализ на банковите приходи в България в условията на криза“, New
Knowledge Journal of Science, (in Bulgarian):
http://uard.bg/files/custom_files/files/documents/New%20knowledge/year2_n1/paper _krystev_-
y2n1.pdf , last visit: 25.09.2016
[5] Marinov, Iv., Petrova, Т. , The Profitability and Efficiency of Banking Intermediation
in Bulgaria, е-Journal VFU, vol. 8, 1-20 pp
55th Science Conference of Ruse University, Bulgaria, 2016
Copyrights© 2016 ISSN 1311-3321 273
[6] Press release from August 18, BNB website
http://www.bnb.bg/PressOffice/POPressReleases/POPRDate/PR_20160818_BG
[7] Statistical data from the Bulgarian National Bank database Monetary statistics,
Interest rate statistics (2010-2016) www.bnb.bg; last visit 24.09.2016
[8] http://www.bnb.bg/bnbweb/groups/public/documents/bnb_download/bs_ebadocument
_27_ bg.pdf , EBA/GL/2015/01, last visit: 25.09.2016г.
... We noted in a previous study that "for the current year of 2016 the Bulgarian monetary sector registers unconventional changes in the structure of its income and expenditures. The current dynamic is becoming a cause of disquietude in small depositors and concerns for the primary functions of the banking sector are raised among the general public" (Stanev, 2016). The current state of the Bulgarian banking sector has not changed much in the past few years: super-liquidity has accompanied it for the period of 2016-2019, forcing both credit and deposit interest rates lower and lower. ...
Conference Paper
Amidst the legislative push towards unifying and lowering banking service fees and commissions in order to make them more available to a larger public, the following paper explores the profitability of savings, deposit and payment accounts within the Bulgarian banking sector in 2019 from the lense of the small, retail customer, offering a new approach towards the calculation of the burden of operational taxes. The main thesis of the paper stipulates that with interest rates and operational fees on banking services as they are, savings accounts can be a significant drain on the finances of the average household in terms of income and savings potential. Since, traditionally, the Bulgarian banking sector dominates over the capital markets, from the standpoint of the average Bulgarian household the lossess incurred from using a payment or savings account can be compensated by owning deposit assets, but, as it turns out-only if said assets are above a significant threshold. An attempt was made to calculate the aforementioned threshold by using empirical data.
Анализ на банковите приходи в България в условията на криза
  • B Krystev
Krystev, B. "Анализ на банковите приходи в България в условията на криза", New Knowledge Journal of Science, (in Bulgarian): http://uard.bg/files/custom_files/files/documents/New%20knowledge/year2_n1/paper _krystev_-y2n1.pdf, last visit: 25.09.2016
The Profitability and Efficiency of Banking Intermediation in Bulgaria
  • Iv Marinov
  • Т Petrova
Marinov, Iv., Petrova, Т., The Profitability and Efficiency of Banking Intermediation in Bulgaria, е-Journal VFU, vol. 8, 1-20 pp