Money, Banks and Finance in Economic Thought

The Great Depression and the Modernization of the Banking System in Bulgaria

Vatchkov Daniel, Institute for Historical Studies - Bulgarian Acedemy of Sciences

By 1931, when Bulgaria began to feel acutely the negative impact of the Great Depression, the banking system in the country turned out to be extremely unstable and without sufficient safeguards to counteract the crisis phenomena. On the one hand, large private banks with foreign capital, under the influence of the problems their headquarters were experiencing, started to withdraw their financial resources from Bulgaria and severely restricted their credit activity in Bulgaria. Bulgarian state banks, due to their active and at times risky investment policy, proved to be without sufficient capital reserves. Many small private and popular banks were in the worst situation. With very limited capital, they were the most vulnerable to the impact of the crisis. As a result, 2/3 of them either officially bankrupted or shrank their business to the absolute minimum. The sharp limitation of lending to the Bulgarian economy and the loss of confidence among depositors called for urgent changes in the banking sector. Apart from the economic situation, reforms in the banking sector were also directly related to the policy of the authoritarian regime established in May 1934 following a military coup. The new power in Sofia was strongly inspired by the example of the right-wing totalitarian systems in Europe, seeking solutions to the economic and financial crisis through powerful state interference. Thus, at the disposal of the government in Sofia, as early as in the summer of 1934 the two major state-owned banks – the Agricultural Bank and the Cooperative Bank – united into one. However, the most important financial project of the new power was the establishment of a large private bank with strong state participation. In October 1934, the merger of 12 Sofia and Provincial Banks led to the establishment of the ‘Bulgarian Credit’ Bank. In the formation of the core capital, as well as in the governing bodies of the bank, Bulgarian National Bank was included, which determined the semi-state status of the new banking institution. The profound changes in the banking sphere soon began to produce positive results. Gradually, the confidence of the population and the companies in the banks began to return, and together with the improving of global economic environment, the level of lending was restored. ‘Bulgarian Credit’ Bank was particularly impressive with its results. For only a year of its existence, it had established itself as one of the big and stable Bulgarian banks and assisted in the overall consolidation of the banking system in the country in the second half of the 1930s.

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Keywords: Great Depression, "Bulgarian Credit"Bank, credit policy, bank consolidation, merger