Banca Monte dei Paschi di Siena (MPS) is the oldest bank in not just Italy, but all of Europe.

Corpbank was one of the newest in Bulgaria.

Both were critical linchpins of their national economies. Both faced liquidity crises. But only one managed to survive.

The widely different fates of these two lenders, who faced similar circumstances and have the same European regulators, has proved emblematic. The European Union might offer a single market, but that doesn’t capitalism is played the same everywhere within it.

“This is a matter of urgent national interest”

On Feb. 16, the Italian Parliament approved a law that could mark a turning point for long-troubled MPS, Italy’s third largest lender, struggling for survival and solvency under the burden of 360 billion euros worth of distressed loans.

Six years ago, the European Central Authority demanded MPS improve its capital ratios. It failed, took a bailout and has since sat at the center of efforts by E.U. and Italian regulators alike, seeking to stabilize the country’s banking system.

Last week, the Parliament’s lower house finally converted into law a decree introduced by Prime Minister Paolo Gentiloni’s cabinet last year. It authorizes as much as 20 billion euros worth of capital injection and liquidity guarantees by the State into Banca Monte dei Paschi di Siena and other troubled lenders, who remain compliant with European regulations on matters of state aid rules.

“There must now be an immediate public rescue to secure (MPS) and head off any systemic risk for banks in trouble,” said Antonio Damiani, chief of CGIL, a banking union. “This is a matter of urgent national interest.”

For the time being, Monte dei Paschi di Siena remains the primary beneficiary of the measure.

Last summer, the bank failed a European-wide banking stress test when it raised only half of the capital the ECB required. Matteo Renzi’s failed constitutional referendum and its devastating impact on Italy’s volatile political system did the rest.

Investors weren’t going to contribute 5 billion euros into a bank with a market capitalization of 442 million euros.

Pressured by skyrocketing political risk in a banking system that is exceptionally susceptible to political developments, MPS formalized a request to obtain extraordinary and temporary financial support from the Italian government, who agreed to provide the necessary capital injection and liquidity guarantees to cauterize MPS’s liquidity crisis.

Banking under the watchful eye of Brussels

Naturally, Monte dei Paschi’s state aid request paved the way for what European regulators call “precautionary recapitalization.”

In order to keep the bank stable and to prevent further disruption of Italy’s bank-centric economy, the European Central Bank (ECB) confirmed that Monte dei Paschi met the minimum capital requirements to qualify.

Regulated by the European framework for the recovery and resolution of credit institutions and investment firms per its “Bank Recovery and Resolution Directive,” state aid is allowed for troubled-- yet still solvent-- financial institutions, in order to minimize risks to a Member state’s financial stability and to protect its economy.

Ultimately, the rule’s goal is to define the terms of a “bail-in,”or preemptive bank rescue by external investors, while avoiding helping banks capable of meeting baseline solvency requirements on their own.

The ECB eventually decided that Monte dei Paschi needed 8.8 billion euros-- not 5 billion--  to survive. It also decided the bank was solvent and could thus accept them, per its rules.

Banking analysts have challenged this claim, arguing MPS was not, in fact, solvent, and that the ECB manipulated its own rules to increase the size of its bailout to a bank that couldn’t survive otherwise.

A “new normal” for European bank bailouts

By approving the 20 billion euros fund, Italy’s institutions, too, have significantly raised the bar of traditional state aid parameters and practice.

In fact, experts have consistently voiced concerns that the country’s banking rescue strategy may precipitate an already vulnerable fiscal outlook for a country with a debt-to-GDP ratio among the highest in Europe, thereby concurring to erode further the confidence of the investors as well as the profitability of the Italian banking industry, with potentially dramatic consequences for both the country’s economy and the fragmented European financial markets.

Especially in light of Monte dei Paschi’s survival, it is hard to dismiss as mere negligence cases in which a European member state’s government or central bank made little or no effort to save a major lender.

The regrettable demise of Corpbank (KTB), Bulgaria’s fourth-largest lender which collapsed in 2014 after a devastating run on deposits, marked the conclusion of an even more staggering story, one in which attempts to precipitate a bank resolution seemed deliberate and strictly informed by political motives.

The media magnate Delyan Peevski, a large debtor to the bank, started damning rumors and false allegations targeting the lender’s management triggered a run on the bank that quickly destroyed the liquidity of both Corpbank and Crédit Agricole Bulgaria, the local subsidiary that Corpbank had recently acquired.

As 20% of Corpbank assets were withdrawn within six days, Corpbank management requested an emergency liquidity injection from the Bulgarian National Bank (BNB), which was rejected on the grounds that Corpbank did not have sufficient assets to support the extraordinary measure.

Not only did the central bank make no effort to stem the liquidity crunch; it ultimately let Corpbank default on a bond payment purportedly due to its lack of cash flow. In June 2014 the BNB took over both Corpbank and its subsidiary, put both under supervision, and suspended their operations for six months.

Lessons of Corpbank?

In September 2014, the European Commission announced it was opening infringement procedures against Bulgaria over inexcusable handling of the Corpbank bank crisis which entailed a flagrant infringement of European regulations on deposit-guarantee schemes.

The Commission lambasted Bulgaria’s “non-justified and disproportionate restriction to the free movement of capital” in spite of less intrusive measures were made available under Bulgarian law, and demanded that Corpbank insured depositors were given access to their accounts. The Bulgarian Deposit Insurance Fund was not large enough to compensate Corpbank insured depositors, and neither raising additional funds nor reopening the bank, and therefore exposing it to the possibility of a new run, appeared to be viable options in a country that had no government from July to October 2014.

Moreover, under the Bulgarian Bank Deposits Guarantee Act then in force, depositors were entitled to access their deposits only after the central bank had filed for bankruptcy and revoked the license of the failing lender after performing a full audit, which would take four months to complete.

BNB conducted an asset valuation of Corpbank with three auditing companies that resulted in an unorthodox – even questionable – audit that was never disclosed to the public. According to the BNB, the auditors were unable to revise the vast majority of Corpbank’s loan portfolio due to missing documentation, yet discovered irrefutable evidence of fraud and intentional abuse perpetrated by the Corpbank management. Corpbank was accused of self-funding  through circular lending transactions, which their accusers said was in breach of Bulgarian regulations regarding the terms of subordinated debt capital.

If the extent of the fraud reportedly ruled out the nationalization of the bank, the overall result of the audit also made Corpbank’s recapitalization with funds from existing shareholders unpracticable.

Unsurprisingly, the central bank even rejected a rescue plan put forward by Corpbank’s major shareholders in order to keep the control of the circle that organized the corporate raiding. Instead, the BNB commenced bankruptcy proceedings, which definitely excluded the possibility of State aid authorized by the European Commission, and on November 6, 2014 revoked Corpbank’s banking license.

Bulgaria’s central bank, whose primary duty is to guarantee liquidity to a troubled national lender until it is recapitalized, allowed Corpbank to destroy its liquidity without providing emergency aid nor advocating for financial support from the European Commission, then it closed the bank down.

Corpbank assets were looted, and several companies that the bank used to finance ended up under Dylan Peevski’s control. The BNB’s conduct was particularly questionable in light of its contingent intervention in favor of First Investment Bank, another major Bulgarian lender that experienced a bank run in the context of the June and July 2014 liquidity crisis.

In that circumstance, Bulgarian authorities issued a 600 million euros state deposit authorized by the European Commission, which went as far as to extend liquidity support to First Investment Bank until May 2016. Furthermore, the central bank remained committed to restoring the bank’s liquidity and supportive of FIB’s efforts to improve its corporate governance structure and risk management policies.

A double standard in Bulgaria’s central bank’s handling of the two banks’ crises is incontestable. What, instead, remains open for discussion is the guiding principle that informed the BNB’s willful misconduct in the Corpbank case. Corruption seems the most obvious answer.

In states in which corrupt practice is endemic and the central bank is in reality an arm of the government, the resolution of a bank can be orchestrated for political calculus and European regulations selectively applied or altogether sacrificed to serve specific interests. Unfortunately, European regulations and institutions seem to have limited impact when bank runs are leveraged to deliberately increase political risk even at the cost of a devastating banking crisis.