World Bulletin/News Desk

Bulgaria is to allow its fourth-biggest lender to collapse and will hive off its healthy activities into a separate bank as it moves to clear up the mess from the country's worst financial scandal since the 1990s.

The central bank said it was removing Corporate Commercial Bank's (Corpbank) licence and alerting prosecutors to the possibility that its main shareholder stole money from the bank just before the central bank took over its operations.

The scandal broke last month when Corpbank clients unnerved by media reports accusing top shareholder Tsvetan Vassilev of shady business deals dashed to withdraw their savings.

The bank run spread quickly to another lender and saw Sofia announce a protective $2.3 billion credit line, a reminder that parts of Europe's financial system are still far from secure despite progress from the worst days of the financial crisis.

"The results of the review of Corporate Commercial Bank speak, to put it mildly, about actions incompatible with the law and good banking practices," the central bank said in a statement as it published the results of an audit.

It said much of the documentation to back up 3.5 billion levs ($2.43 billion) out of Corpbank's total 5.4-billion-lev loan portfolio was missing. The documents were, it believed "most likely destroyed in the days before the central bank sent administrators there."

A significant part of the loan portfolio was linked to parties related to Corpbank's main shareholder, the central bank said.

Central bank administrators found Vassilev had withdrawn 205 million levs from the bank via a third party just before the state took control. Prosecutors would need to determine whether that withdrawal amounted to theft, the central bank said.

State prosecutors said on Friday they were investigating whether Corpbank's chief treasurer, Margarita Petrova, had taken bags of money from the bank's vaults on Vassilev's behalf.

Senior Corpbank executive Orlin Rusev was arrested on Friday over allegations that he ordered the withdrawal, the prosecutors said. They said they also planned to summon Vassilev.

"There are indications of a serious felony and we are investigating it," Interior Minister Tsvetlin Yovchev told reporters. "...Obviously, money that was supposed to be in the vault (of Corpbank) is missing".

Petrova, Rusev and Vassilev, who denies any wrongdoing, could not immediately be reached for comment. Corpbank's spokeswoman has said the central bank has banned it from making public statements without its approval.

"BARREL WITHOUT A BOTTOM"

The scandal has stoked memories of a 1996-97 crisis in which 14 Bulgarian banks collapsed and comes as Europe's banks emerge from the shadow of a financial crisis that led to bank meltdowns around the region's periphery.

Bulgaria's finance minister said on Friday the plan to rescue part of Corpbank could swell the country's fiscal deficit this year to more than 3 percent of gross domestic product (GDP) against a planned target of 1.8 percent.

Bulgarian authorities had initially said they would reach out to other Corpbank shareholders, which include Oman's sovereign wealth fund and Russia's VTB bank, to rescue the lender after the bank run drained more than a fifth of deposits.

Failing that, the central bank had said it would aim to nationalize Corpbank by using two state institutions to recapitalise it.

The results of the audit published on Friday show that is no longer an option, the central bank said.

Due to the lack of documentation, the auditors said they could not value the 3.5 billion levs in Corpbank's loan portfolio, the collateral backing the loans or the ability of debtors to repay them.

Bulgaria will now split off the sounder assets and liabilities of Corpbank into a unit of the lender called Credit Agricole, which Corpbank acquired from its French parent just a week before the central bank commandeered the lender.

Bulgaria plans to have this unit nationalised and re-open it for operations on July 21.

"We cannot continue to fill a barrel without a bottom, as the wise Bulgarian people say, and we cannot nationalise Corporate Commercial Bank in its current state, as we announced before the results of the audit," the central bank said.

"But our aim remains unchanged - that the citizens and the companies receive the full amount of their funds. The only exception from that will be the companies of the majority shareholder and parties and companies related to him."

THE "ONLY POSSIBLE" PLAN

The plan aims to reassure investors that Corpbank's woes are isolated and pose no broader risk to the financial stability of the EU's poorest member state.

"The central bank's plan looks like the only possible one - to get the good part of the bank's assets and put it in a healthy, nationalised institution," Lachezar Bogdanov, economist with Sofia based Industry Watch think-tank

"If the central bank finds a swift solution now and really gets the support of the state, Bulgaria can actually issue a strong signal that it has working institutions."

The central bank initially blamed the run on Corpbank on media reports about Vassilev and on leaked news that a central bank deputy governor in charge of banking supervision was under investigation. Central Bank Governor Ivan Iskrov called the leak a deliberate "attack" on the bank.

Behind closed doors, some government officials blamed the run on a clash between Vassilev and his political rivals, without saying who they were.

But the scandal has also raised the question of whether the institutions tasked with ensuring a robust, accountable banking sector are up to the job.

Official documents published earlier this year suggested Corpbank was in rude financial health, with less than 1 percent of its loan book classed as non-performing at the end of 2013, against a sector average of 17 percent. Corpbank's reported earnings grew 19 percent in the first quarter to 13 million levs.

The 3.5 million euros of loans with inadequate documentation make up almost 65 percent of the bank's loan book, according to the central bank audit. The bank's equity and reserves came to 622 million levs on March 31, suggesting a very limited capacity to absorb loan losses. Deposits at that time stood at 5.9 billion levs.