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The Greek banking system during the Greek debt crisis Christos Vl. Gortsos Associate Professor of International Economic Law, Panteion University of Athens Secretary General, Hellenic Bank Association. September 2011. TABLE OF CONTENTS. I. The Greek banking system – An overview

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The Greek banking system during the Greek debt crisisChristos Vl. GortsosAssociate Professor of International Economic Law, Panteion University of Athens Secretary General, Hellenic Bank Association

September 2011

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TABLE OF CONTENTS

I. The Greek banking system – An overview

  • The effect of the global financial crisis on the Greek banking system
  • The impact of the Greek fiscal crisis to the banking system
  • Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system
  • The new support programme for Greece with respect to the adjustment programme
  • Conclusions
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I. The Greek banking system – An overview

The Greek banking sector

  • 60 banks with 4,200 branches
  • 64,000 employees

Four main categories of banks operating in Greece:

  • 18 commercial banks established in Greece
  • 16 cooperative banks established in Greece
  • 22 branches of banks established in another Member State of the EU
  • 4 branches of banks established in third countries (outside the EU)

HBA members

  • 25 commercial banks (93% market share)
      • 15 commercial banks established in Greece
      • 9 branches of banks established in another Member State of the EU
      • 1 branch of a bank established in a third country (outside the EU)
  • 440 billion € in assets (as of 30.6.2011)
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I. The Greek banking system – An overview

Greek banks

  • manage an equivalent of 113% of the Greek GDP (loans to households and businesses),
  • hold an equivalent of 106% of the Greek GDP in deposits and repos,
  • lend 115,6 billion € for housing purchase and consumer credit, an equivalent of 10,246 € per inhabitant,
  • with an aggregate balance sheet at 210% of GDP, the size of the Greek banking system is not excessive compared to other countries,
  • the average loan-to-deposit ratio was 135% at the first semester of 2011 (2008 - 2009: 114%) mainly due to the shrinking deposits
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The Greek banking system – An overview

  • Composition of bank loans (end-May 2011)
  • Consumer credit: 14%
  • Corporate loans: 54%
  • Mortgage loans: 32%
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II. The effect of the global financial crisis

on the Greek banking system (2007-2009)

  • Greek banks were not exposed to risks that triggered the causes of the recent global financial crisis
  • Thus, the spillover effects from the global financial crisis on the Greek banking system were limited. Accordingly, there was no need to activate a bank rescue program
  • The recovery program adopted by the Greek government (the 28 bn euro “package”) in late 2008 was mainly aimed at the enhancement of liquidity conditions in the system
  • Moreover, the level of deposit guarantee was raised to 100,000 euros (from 20,000) per depositorimmediatelyafter the bankruptcy of Lehman Brothers in order to enhance depositor confidence in the system (successfully)
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II. The effect of the global financial crisis

on the Greek banking system (2007-2009)

  • However, during the global financial crisis liquidity conditions were strained
  • Greek banks had limited access to wholesale markets to fund their lending activity
  • Maturing inter-bank liabilities put additional pressure on their liquidity position
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II. The effect of the global financial crisis

on the Greek banking system (2007-2009)

Despite the problems, Greek banks have shown remarkable resilience and were able to overcome the difficult days due, inter alia, to a number of factors:1. They hada strong capital base and steadily increased their provisions (more than 40% Year on Year)

2. They were facilitated by measures taken by the European Central Bank and the Greek government

3. The effective prudential supervision by the Bank of Greece ensured the stability of the Greek banking system

During the global financial crisis, the Greek banking system remained healthy, adequately capitalized, and highly profitable

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III. The impact of the Greek fiscal crisis to the banking system

The Greek banking system was negatively affected mainly by the Greek debt crisis. Greek banks are facing the following main challenges:

1. The liquidity situation of banks remains tight:

  • Bank deposits declined by 18,2% since the beginning of 2010 (and 19,8% since the beginning of 2009)
  • Extremely limited access to the inter-bank money and debt capital markets
  • Reliance on Eurosystem credit. Borrowing from the ECB represents, currently, nearly 22% of banks\' liabilities (July 2011: 96,3 billion €, December 2010: 97,7 billion €)
  • In July 2011interest rates for new deposits from households with agreed maturity up to 1 year were the highest (4,28%) among the Eurozone
  • In July 2011 interest rates for new deposits from non-financial corporations with agreed maturity up to 1 year were the highest (3,82%) among the Eurozone
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III. The impact of the Greek fiscal crisis to the banking system

2. Improving Capital Adequacy:

  • The average CAR at the end of December 2010: 12,2%
  • The average Tier I ratio at the end of December 2010: 10,9%
  • The average Core Tier I ratio at the end of June 2011 after PSI impact: 9,3%
  • Source: Bank of Greece, Annual Report 2010
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III. The impact of the Greek fiscal crisis to the banking system

3. M&As and other measures for the Capital Adequacy improvement :

  • In August 29 the Boards of Directors of Alpha Bank and Eurobank EFG announced that they have reached agreement on a combination of Alpha Bank and Eurobank EFG by way of a merger. The new group will be among the top 25 largest Eurozone banking groups with pro forma total assets of €146 billion (as at H1 2011, excluding Poland)
  • Certain banks carried out successful capital increases on the market: NBG (€1,8 billion), PIRAEUS Bank (€0,8 billion),
  • In April 2011, Agricultural Bank of Greece(ATE) announced a share capital increase of €1,26billion. The European Commission has approved under EU State aid rules the restructuring plan of Agricultural Bank of Greece which involves a State recapitalisation of the bank of up to € 1.144.5 million as well as liquidity measures
  • Sales of subsidiaries: sale by NBG of a minority stake in Finansbank (Turkey) - EurobankEFG sale of a majority stake in Polbank (Poland) – Piraeus Bank sale of its subsidiary Piraeus Bank Egypt(formerEgyptian Commercial Bank)
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III. The impact of the Greek fiscal crisis to the banking system

4. Non-performing loans

    • NPLs increased to 10,4% in December 2010 (from 7,7% at the end of 2009)
    • 74% or 18,7 bn. € (December 2009: 75,5% or 14,9 bn. €) of the NPLs are secured loans (loans to non-financial corporations and mortgage loans)
  • 5. Greek government 10-year bonds spreads vis-à-vis German Bonds (bp)

Source: Bank of Greece

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III. The impact of the Greek fiscal crisis to the banking system

6. Consolidated foreign claims of reporting banks - immediate borrower basis on individual countries by nationality of reporting banks /Amounts outstanding (as of end-March 2011)

Source: BIS Quarterly Review, September 2011

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III. The impact of the Greek fiscal crisis to the banking system

6. Consolidated foreign claims of reporting banks - immediate borrower basis on individual countries by nationality of reporting banks /Amounts outstanding (as of end-March 2011)

Source: BIS Quarterly Review, September 2011

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III. The impact of the Greek fiscal crisis to the banking system

7. Bank credit to the domestic private sector is marginally negative …

Source: Bank of Greece, Bank credit to domestic enterprises and households, monthly press releases

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III. The impact of the Greek fiscal crisis to the banking system

7. … and the corresponding trend in US, Eurozone and UK

Source: IMF, Global Financial Stability Report, January 2010

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III. The impact of the Greek fiscal crisis to the banking system

8. Pre tax PSI impact

According to the 2nd quarter 2011 results the pre tax PSI impact for nine (9) Greek banks and two (2) branches of banks established in another Member State of the EU (88% market share) are estimated to 6,4 billion €

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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 1. Supervisory measures
  • 1.1 Stress tests
  • According to the results of the EU-wide stress-testing exercise -which was conducted in 2010 by the predecessor of the European Banking Authority (the Committee of European Banking Supervisors) and national supervisory authorities, in close cooperation with the European Central Bank - in order to assess the overall resilience of the EU’s banking sector to major economic and financial shocks, for the Greek six (6) banks, as a whole, which participated, the results indicate:
  • a net surplus of Tier 1 capital of the order of € 3.3 billion above the 6% ratio of Tier 1 capital that was agreed as a benchmark solely for the purpose of the stress test (the baseline scenario)
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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 1. Supervisory measures
  • 1.1 Stress tests
  • The EU-wide stress-testing exercise of 2011, conducted under the coordination of the European Banking Authority, in cooperation with national supervisory authorities, the European Central Bank, the European Commission and the European Systemic Risk Board, for the six (6) largest Greek banking groups (representing over 90% of the total assets of the Greek banking system), considered as a whole, resulted in the following:
  • a capital surplus of € 2,44 billion above the amount that corresponds to the Core Tier 1 capital ratio threshold of 5%. Under the adverse scenario, before taking into consideration additional mitigating measures, four out of six Greek banking groups came in above the 5% threshold, one came in marginally below the 5% threshold and another one came in significantly below the 5% threshold.
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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 1. Supervisory measures
  • 1.1 Stress tests
  • With regard to the threshold and the capital ratio 2 key features distinguish 2011 exercise from that performed in 2010.
  • first, the threshold was set up 5% in 2011 compared with 6% in 2010,
  • second, the definition of capital used for 2011 exercise was a Core Tier 1 capital ratio, compared with a Tier 1 capital ratio used in last year’s exercise
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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 1. Supervisory measures
  • 1.2 Other supervisory measures
  • Based on the timetable for the implementation of the “Memorandum of Economic and Financial Policy” and to facilitate the access of the Greek banks to the international money markets, the Bank of Greece required Greek banks:
  • to develop and implement medium-term funding plans, and
  • to maintain a minimum Core Tier 1 capital ratio of 10% (from the beginning of 2012).
  • Additionally, the Bank of Greece proceeded with a diagnostic study of the loan portfolios of the Greek banks. The study will be completed by the end of 2011.
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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 2. Institutional measures
  • 2.1 Hellenic Financial Stability Fund (Law 3864/2010)
  • The Financial Stability Fund (hereinafter “the Fund”), established in 2010, is a legal person governed by private-law.
  • The Fund shall have full legal capacity and locus standi, it shall not belong to the public sector and shall enjoy administrative and financial independence, shall operate purely in accordance with private economic activity standards and shall be governed by the provisions of Law 3864/2010. The purely private-sector character of the Fund shall not be prejudiced by the fact that its capital shall be paid up in full by the Greek State or by the issuance of the relevant decisions of the Minister of Finance.
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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 2. Institutional measures
  • 2.1 Hellenic Financial Stability Fund
  • The purpose of the Fund shall be to safeguard the stability of the Greek banking system by strengthening the capital adequacy of banks, including subsidiaries having their registered office abroad, legally operating in Greece, in case a bank faces problems of capital adequacy as specified in the Law 3864/2010.
  • In fulfilling this purpose, the Fund shall manage its capital and assets in general and shall exercise the rights deriving from its capacity as shareholder in such way as to preserve the value of such assets, to minimize risks to Greek taxpayers and not to hamper or distort competition in the banking sector.
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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

2. Institutional measures

2.1 Hellenic Financial Stability Fund

The Fund is operating, its Board of Directors has been elected and by-end June 2011 it is fully operating. Its capital is foreseen to be 10 bn euros originating from the support mechanism of the Greek economy by euro area Member States, the European Central Bank and the International Monetary Fund

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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 2. Institutional measures
  • 2.2 Council of Systemic Stability (Law 3867/2010, article 20)
  • It was established by the Ministry of Finance
  • Its purpose is the analysis of the dynamics between the various sectors of the financial system and their constant monitoring in order to address proactively situations of stress and crises
  • It consists of seven (7) members (including the Minister of Finance, the Deputy Minster of Finance, the Governor of the Bank of Greece, the Sub-Governor responsible for these issues of the Bank of Greece, the President of the Hellenic Capital Markets Commission and two (2) persons with specific knowledge of the financial sector determined by the Minister of Finance)
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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

3. Regulatory measures

3.1 Issuance of additional government guarantees to be used as collateral in order to obtain funding form the European Central Bank (15, 25 & 30 billion euros respectively) (laws 3845/2010, 3872/2010 and 3965/2011). Said packages, based on the recovery program of 28 bn, adopted by the Greek government in late 2008 in order to enhance the liquidity of the Greek banking system, were authorised by the European Commission under State aid control rules

3.2 As already mentioned, the level of deposit guarantee was raised to 100,000 euros (from 20,000) (Law 3714/2008), per depositor,immediatelyafter the bankruptcy of Lehman Brothers in order to enhance depositor confidence in the system (successfully)

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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 3. Regulatory measures
  • 3.3 Draft Bill on recovery and resolution measures
  • Said draft bill, which will be voted this week, contains, inter alia, provisions on:
  • the strengthening of the supervisory powers and measures which may be taken by the Bank of Greece in case banks do not or there are strong indications that they do not comply with the basic banking law and the relevant decisions of the Bank of Greece (under a),
  • the conditions under which a Commissioner has to be or may be appointed by the Bank of Greece to a bank and its powers (under b),
  • resolution measures which may be taken by the Bank of Greece (under c), and
  • the creation of a Resolution Fund (under d)
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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 3.3 Draft Bill on recovery and resolution measures
  • Supervisory measures
  • The Bank of Greece shall require any bank that does not meet, or if there exist strong indications that it does not meet- the requirements of the basic banking law, inter alia:
    • to hold own funds in excess of the minimum level laid down in its generally applicable decisions on capital adequacy,
    • to increase its capital,
    • to perform recovery or resolution plans,
    • the pre-approval by the Bank of Greece of transactions which may be to the detriment of the solvency of the bank
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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 3.3 Draft Bill on recovery and resolution measures
  • (b) Commissioner
  • The draft bill distinguishes between conditions under which a Commissioner to a bank has to be or may be appointed by the Bank of Greece.
  • Its powers are significantly strengthened and she/he may exercise (or collaborate to) the management of the bank.
  • The Commissioner shall be subject to control and supervision by the Bank of Greece.
  • She/He is appointed for a period not exceeding 12 months. However, its appointment may be extended up to 6 months.
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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 3.3 Draft Bill on recovery and resolution measures
  • (c) Resolution measures
  • The relevant provisions of the draft bill, which are novum, determine the resolution measures, which may be taken by the Bank of Greece in the sake of the protection of financial stability and the enhancement of public confidence to the system. The draft bill provides for the conditions under which these measures are activated, such as the impossibility of taking alternative measures of equivalent effect. The resolution measures include:
    • the increase of capital,
    • the transfer of assets of a bank to another bank, and
    • the creation of a “bridge bank” by decision of the Minister of Finance under recommendation of the Bank if Greece, to which all or part of the assets of the initial bank are transferred. Its duration will not exceed a period of three (3) years
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IV. Institutional, supervisory and regulatory measures for the enhancement of the Greek banking system

  • 3.3 Draft Bill on recovery and resolution measures
  • (d) Resolution Fund
  • According to the relevant provisions of the draft bill, which are also novum, a Resolution Scheme will be created to the existing Hellenic Deposit Guarantee and Investors Compensation Scheme.
    • The Resolution Scheme, which will be independent from the Deposit Guarantee Scheme as well as the Investor Compensation Scheme shall provide funding: either in case of transfer of assets of a bank to another bank or in the case of the creation of a “bridge bank”.
    • The participation of Greek banks in the Resolution Scheme is mandatory as well as the payment of contributions to it
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V. The new support programme for Greece with respect to the adjustment programme

  • The July 2011 support programme for Greece (after the pact for the Euro), which has been endorsed in order to establish a stronger economic policy coordination for competitiveness and convergence provides - in view of the commitments undertaken by Greece - the following in relation to the adjustment programme of Greece :
  • the total official financing will amount to an estimated 109 billion euro. For the period 2011-2019, the total net contribution of the private sector involvement (PSI) is estimated at 106 billion euro
  • the interest rate on its loans will be close to, without going below, the EFSF funding cost (currently approx. 3.5%)
  • lengthen the maturity of future EFSF loans to Greece to the maximum extent possible from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years
  • Task Force creation which will work with the Greek authorities to target the structural funds on competitiveness and growth, job creation and training
  • adequate resources provisions (20 bn) to recapitalise Greek banks if needed
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VI. Conclusions

Under current conditions, the challenge for the Greek banking system has

mainly three aspects:

To maintain the stability, with adequate capital adequacy ratios and adequate liquidity

To assist enterprises and households to accommodate with the inconveniences caused by the recent economic downturn

On the medium term, to comply smoothly with the regulatory storm underway (Basel III, Review of the Deposit Guarantee Schemes Directive, banking resolution, taxation of the financial sector, SIFIs)

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