The financial sector in Bulgaria has experienced significant growth over the past few decades, with the banking industry being the most critical component. However, like any other jurisdiction, Bulgarian banks are exposed to risks, including credit, market, and operational risks. These risk factors can lead to bank failures, potentially affecting depositors. To protect depositors in such cases, the Deposit Guarantee Scheme (DGS) of Bulgaria plays a crucial role. The Deposit Guarantee Scheme in Bulgaria is activated when a bank is declared insolvent by the Bulgarian National Bank (BNB) or when a court decision determines that the bank has failed. The BNB may revoke a bank’s license, leading to the activation of the scheme.

Some of the key definitions related to the Deposit Guarantee Scheme activation in Bulgaria include:

  1. Insolvency: The inability of a bank to meet its financial obligations.
  2. Bank failure: The situation in which a bank can no longer continue its operations.
  3. Deposit: A sum of money placed with a bank, typically in a savings or checking account.
  4. Guaranteed deposit: A deposit covered by the Deposit Guarantee Scheme.

Legal framework for bank deposit insurance in Bulgaria: The legal framework governing the Deposit Guarantee Scheme in Bulgaria is established by the Law on Bank Deposit Guarantee (LBDG) and the Law on Credit Institutions (LCI). These laws outline the rights and responsibilities of the parties involved, as well as the regulatory framework for the DGS.

Operator of the DGS in Bulgaria: The Bulgarian Deposit Insurance Fund (BDIF) is the entity responsible for managing the Deposit Guarantee Scheme in Bulgaria. It is an independent, public institution headquartered in Sofia, Bulgaria.

Coverage amounts and the possibility to exceed the coverage limit: In Bulgaria, the Deposit Guarantee Scheme covers deposits up to 196,000 BGN (approximately 100,000 EUR) per depositor, per bank. Joint accounts are treated as separate deposits, with each account holder receiving coverage up to the limit. It is important to note that the coverage limit cannot be exceeded, even if a depositor holds multiple accounts with the same bank.

Repayment procedure and timeframe: When the DGS is activated, the BDIF is responsible for repaying the insured account balances to depositors. Depositors will receive a notification from the BDIF with instructions on how to submit their claim. The repayment process typically begins within 7 working days of the DGS activation, and the BDIF aims to complete repayments within 20 working days.

Deadline for filing claims: Depositors have a period of 3 years from the date of the DGS activation to file their claims. If a claim is not submitted within this timeframe, the depositor may lose their right to reimbursement.

Exclusions from DGS coverage and options for unexpected claim rejections: Certain types of deposits are excluded from coverage under the DGS in Bulgaria, including:

  1. Deposits made by financial institutions, insurers, and investment firms.
  2. Deposits from government institutions, including central and local authorities.
  3. Deposits linked to money laundering or other criminal activities.

In case of unexpected claim rejections, depositors can appeal the decision by submitting a written complaint to the BDIF. If the issue remains unresolved, they may seek legal recourse through the Bulgarian courts.

Next steps: After a bank has been declared insolvent and the DGS is activated, the bank’s license is revoked, and its assets are liquidated to repay creditors and other claimants. The liquidation process is carried out under the supervision of the Bulgarian National Bank (BNB) and the relevant court-appointed administrators. Creditors, including those with claims not covered by the DGS, need to file their claims with the appointed administrators within the specified deadline.

Secured creditors, such as those with collateral, typically have priority during the liquidation process. Unsecured creditors, including those with claims exceeding the DGS coverage limit, are ranked according to the priority set by the Bulgarian legislation. These creditors may recover a portion of their claims depending on the proceeds from the liquidation of the bank’s assets.

It is essential to note that the liquidation process can be lengthy, and the recovery of claims may take several years. The appointed administrators are responsible for providing updates and information to the creditors regarding the progress of the liquidation process and any recovered funds.

Lessons learned: In recent months, no major banks in Bulgaria have failed. The Bulgarian banking system has shown resilience in the face of economic challenges, due in part to the regulatory oversight provided by the Bulgarian National Bank (BNB). While there have been concerns in the past over the stability of some Bulgarian banks, the situation has improved thanks to rigorous stress tests, more stringent regulations, and the ongoing efforts of the BNB to safeguard the financial system. Consequently, the Bulgarian banking sector has remained relatively stable and has managed to weather any significant turbulence.

However, it is essential to learn from past incidents to maintain this stability. In 2014, Bulgaria witnessed the collapse of the Corporate Commercial Bank (CCB) due to mismanagement and a run on deposits, which exposed the need for stronger regulatory oversight and risk management practices in the banking sector. Since then, the BNB has implemented measures to improve transparency, enhance corporate governance, and increase capital buffers to protect against future crises. The lessons learned from past failures emphasize the importance of vigilance, strong regulation, and effective risk management in ensuring the stability and soundness of any financial system.