Impressive news has emerged from the banking sector once again. Unlike recently when people mostly received news about bankruptcies, government emergency aid and bad loans, today the picture is different but no less shocking. This is so because a 20-percent rise in annual bank profits and 0-percent interest rate are not things that Bulgarians are used to see.

Banks are actually full of money. Banks’ own funds have increased by more than 450 million euro a year, while bank deposits have risen by 2 billion euro, reaching the total level of over 21 billion. These figures would have been a reason for happiness, if they didn’t mask a rather disturbing reality. Banks have more money but the level of loans remains the same, which means that there would be no great benefit to the real economy from this money. This is also a reason to wonder where the huge profits of banks and growing deposits come from as the country's economy has been growing by modest 3 percent. There are no investments and no rise in consumption that could lead to such profits and growing deposits. On the contrary - foreign investments come mainly from Brussels and consumption is shrunk because of the lack of willingness of Bulgarians to spend their hard-earned money as they risk remaining without incomes in the near future. This imbalance between heaps of money in banks and modest business activity has forced the central bank to bring down interest rates to 0 percent. This should mean cheaper loans to businesses and households. Ultimately, this should be a stimulus for economic recovery. Because of the currency board in Bulgaria, the positive effect of lowering the basic interest rate will be very limited, but this is the only reasonable move that BNB can legally make.

The range between the 20-percent rise of bank profits and 0% interest rate of the central bank is quite large but whether positive or negative the effects are yet to become clear. But another thing is already known and it is that Bulgarian banks will be subjected to stress tests this year. The aim is to reveal the "rotten apples," to cleanse banks' loan portfolios and to strengthen them to the extent that they would be able to withstand market shocks that sent the fourth largest Bulgarian bank in bankruptcy just a year ago. Recent data on bank profits and reduction of bad and non-performing loans provide optimism and give better guarantees for the stability of the Bulgarian banking system.

English: Alexander Markov