Although markets are treating the situation in Bulgaria as an isolated event, its financial sector faces a problem common in the region: rising levels of non-performing loans (NPLs).
Banks in Croatia, Romania and Hungary, as well as Bulgaria, are weighed down by loans that turned sour following the surge in credit in the build-up to the global financial crisis of 2008/09. The problem has been compounded by a tightening of credit conditions since the crisis, with the parent banks of many local lenders (often headquartered in western Europe) no longer willing or able to roll over credit lines.
NPLs accounted for 16.6 percent of total loans in Bulgaria, according to the latest data from the World Bank. This compares to 21.6 percent in Romania and 15.4 percent in Croatia, but only around 5 percent in nearby Slovakia and Poland.
"Vulnerabilities in the region's banks have declined over the past three years, but they haven't gone away altogether. Accordingly, it wouldn't be surprising to see further bank failures from time-to-time over the coming years," said Jackson.
"This seems likely to happen in those countries that have seen the largest rise in non-performing loans. This includes Bulgaria, Hungary, Romania and Croatia."
Analysts including Jackson noted that the predominance of foreign-ownership in emerging Europe's financial sector left its banks vulnerable to shocks elsewhere in the Europe.
In common with some of its neighbors, Bulgaria's two biggest banks are both foreign-owned. UniCredit Bulbank is part of the Italian banking giant and DSK Bank belongs to Hungary's OTP Bank.