Capital Adequacy (Basel II)

The Bank of Greece Governor’s Acts 2630/2010, 2588/2007, 2589/2007, 2590/2007, 2646/2011, 2592/2007, 2645/2011, 2594/2007, 2595/2007, 2635/2010 and 2620/2009 conclude, by authority of Law 3601/2007, the transposition into Greek law of the provisions of Directives 2006/48/EC and 2006/49/EC on capital adequacy of credit institutions and investment firms. This supervisory framework, known as “Basel II”, comprises the following three fundamental supervisory Pillars:

Methods for calculating capital requirements for the credit risk that banks typically face in the pursuit of their activities and capital requirements for operational risk (Pillar 1).
The principles, procedures and criteria whereby credit institutions and the supervisory authority (the Bank of Greece) assess the capital adequacy and the risk management system of each credit institution, in relation to any type of risk to which it is or may be exposed, in addition to those addressed under Pillar 1 (Pillar 2).
Disclosure requirements with a view to enhancing transparency and market discipline by allowing the parties concerned to compare both the credit institutions’ risk management policies and capital and organisational adequacy (thus offering incentives for improvement), and the supervisory authorities’ methods and practices (Pillar 3).

Bank of Greece Governor's Act 2630/ 2010: "Codification of 2587/20.8.2007 -Definition of the own funds of credit institutions registered in Greece"

Bank of Greece Governor’s Act 2630/2010, which replaces Governor’s Act 2587/2007:

(a) consolidates into a single document individual regulations in force concerning the supervisory recognition of minority rights, the possibility of solo consolidation of individual subsidiaries of credit institutions and the repurchase of hybrid securities, and

(b) incorporates the provisions of Directive 2009/111/EE the European Parliament and Council concerning the definition of own funds of credit institutions and particularly it determines:
i. new conditions based on the criteria of permanence, flexibility in the suspension of payment of interest / dividends and loss absorbency, as well as new limits on the recognition of hybrid instruments on Original Own Funds (Tier 1 Capital) for credit institutions and
ii. requirements for recognition of cooperative shares in original own funds (Tier 1 Capital) for cooperative banks.

Bank of Greece Governor’s Act 2588/20 August 2007: "Calculation of capital requirements for credit risk according to the Standardised Approach" (amended by Governor’s Act 2631/29.10.2010)

This Act establishes the method for calculating capital requirements for credit risk by the Standardised Approach, which is simpler than the new alternative relevant approaches, and improves the earlier framework by establishing a more proportionate correlation between own funds and risk assumed, as it:

(a) expands the scale of the weights assigned to each category of banks' financial or other exposures;

(b) takes into account parameters, such as the borrower’s credit assessment by recognised External Credit Assessment Institutions (ECAIs); risk dispersion, allowing the risk weight assigned to loans of up to €1 million to natural persons or small- and medium-sized enterprises to be decreased from 100% to 75%; residential collateral, allowing the risk weight assigned to loans to be decreased from 50% to 35%, while, in contrast, a repayment delay of more than 90 days increases the weight etc.; and

(c) recognises other types of collateral, as well as more advanced techniques for credit risk mitigation, such as credit derivatives.

Bank of Greece Governor’s Act 2589/20 August 2007: "Calculation of capital requirements for credit risk according to the Internal Ratings-Based Approach" (amended by Governor’s Act 2631/29.10.2010)

This Act sets out the Internal Ratings-Based Approach (IRB Approach), which introduces a completely new methodology for the calculation of capital requirements, based on risk parameters such as the borrower’s probability of default and the credit institution’s loss given default, allowing for the first time credit institutions to use their own internal management systems and models in estimating these parameters.

The use of this approach and its more advanced version (Advanced IRB) is subject to approval by the Bank of Greece or, in the case of a subsidiary of a bank based in the European Union, by the supervisory authority of the country in which the parent bank is based, following consultation with the Bank of Greece. Approval is granted upon proven fulfilment of certain requirements with reference to the adequacy of the internal systems developed by the bank for borrower and loan rating, the quantification of risk parameters, the confirmation of the relevant results and their use in the decision-making process as regards loan granting and pricing.

Bank of Greece Governor's Act 2590/20 August 2007: "Credit institutions’ minimum capital requirements for operational risk" (amended by Governor’s Act 2631/29.10.2010)

The establishment of capital requirements for operational risk constitutes a major innovation of the new framework. The notion of this risk relates to potential losses from inadequate or failed internal processes or people, and also covers legal risk. This Act also allows credit institutions to choose between the standardised and the advanced approaches for the calculation of capital requirements for this risk.

Bank of Greece Governor's Act 2646/9 September 2011: "Calculation of credit institutions’ capital requirements for market risk"

This Act replaces Governor’s Act 2591/2007, as applicable, in order to incorporate the provisions of Directive 2010/76/EC. The main amendments relate to the calculation of the capital requirements with regard to the trading book. In particular, the Act provides, inter alia, for:

the obligation for credit institutions that use internal models for the capital requirements against general risk, to calculate extra capital charges according to their Value-at-Risk model based on a stressed period (Stressed VaR)
the obligation for credit institutions that use internal models for the capital requirements against specific risk, to calculate extra capital charges for incremental default and migration risk for bonds and stocks
the obligation for credit institutions to carry out, at least, a hypothetical back-testing for the evaluation of internal models for potential loss
the increase of the risk weight from 4% to 8% for specific risk, so as to calculate the capital requirement for shares under the standardized method
the obligation for credit institutions to establish procedures that will adjust the current value of their non highly liquid assets.

Bank of Greece Governor's Act 2592/20 August 2007: "Credit institutions’ disclosure of data and information on their capital adequacy, the risks they assume and the management thereof"(amended by Governor’s Act 2632/29.10.2010)

This Act establishes general criteria and obligations regarding credit institutions' disclosure of information mainly related to:

(a) the businesses of the credit institution’s group (as defined for supervisory and accounting purposes);

(b) the credit institution’s own funds and its capital adequacy calculation method; and

(c) its exposure to each risk category, including the strategic goals, assessment methods and mitigation techniques related to these risks.

It also sets out the frequency, method and means of information disclosure and verification. As a rule, the relevant data are published at least annually on the credit institution’s website.

Bank of Greece Governor's Act 2645/9 September 2011: "Calculation of weighted exposures for securitisation positions"

This Act, which replaces the Governor’s Act 2633/29.10.2010:
(i) consolidates into a single text provisions relating to the calculation of banks’ capital requirements with regard to credit risk exposures to securitisation, so as to ensure that credit institutions have sufficient capital to cover credit risk that they maintain or undertake with this technique and

(ii) incorporates the provisions of Directive 2010/76/EC of the European Parliament and Council relating to capital requirements for positions in resecuritisation (CRD III) and especially:
a. introduces a definition of "resecuritisation" and "resecuritisation position'
b. adds additional risk weights for positions in resecuritisation;
c. specifies the application of the Supervisory Formula Method for positions in resecuritisation.

Bank of Greece Governor's Act 2594/20 August 2007: "Counterparty risk" (amended by Governor’s Act 2634/29.10.2010)

This Act allows credit institutions to use new advanced methods for calculating the value of their exposures, in particular from repurchase agreements (repos) and derivative contracts, so that they may calculate their capital requirements for counterparty risk. This risk relates to a credit institution’s loss from counterparty default, also taking into account any volatility of the market prices of the financial instruments involved in the transaction.

Bank of Greece Governor's Act 2595/20 August 2007: "Establishment of the criteria that must govern credit institutions’ Internal Capital Adequacy Assessment Process (ICAAP) and Supervisory Review Process (SRP) by the Bank of Greece"

This Act, in addition to the provisions under Pillar 1, lays down:

(a) Qualitative criteria for the calculation of each credit institution’s capital adequacy, depending on its particular characteristics.

(b) The notion of “internal capital”, which is broader than that of “supervisory capital”, as calculated using the methods of Pillar 1, since internal capital relates to funds that a credit institution must maintain in adequate quantity, quality and distribution in order to address the various risks it is or may be exposed to, including, but not limited to, those that are not covered or are insufficiently addressed under Pillar 1, such as concentration risk, strategy risk, goodwill risk, as well as external risks stemming from the institutional, economic or business environment.

(c) The process of the Bank of Greece's supervisory assessment of a credit institution’s overall compliance with its obligations, which will be the subject of deliberations with the credit institution. The object of such deliberations will be to reach a mutual understanding of the applied methods and remedy their weaknesses in a timely manner. Within this context, the Bank of Greece may either take the supervisory measures provided for by Law 3601/2007, including imposing additional provisioning requirements, or, if it considers that risks are not tackled effectively by the relevant corrective measures, impose additional capital requirements. The individual issues of the relevant procedure, the scope and frequency of which shall be based on the principle of proportionality, will be further specified by consultation between the Bank of Greece and credit institutions.

Bank of Greece Governor's Act 2635/29 October 2010: "Supervision and control of credit institutions’ large financial exposures"

This Act adjusts and codifies into a single text the provisions currently in force regarding the control of large financial exposures. The main adjustments relate to:

(a) the recognition of collateral reducing the level of large financial exposures, by way of analogy to the provisions of the foregoing Bank of Greece Governor’s Acts on credit and market risk; and

(b) the establishment of a separate cap on a bank’s total financial exposures to its major shareholders and any associated individuals or enterprises.

Bank of Greece Governor's Act 2620/28 August 2009: "Supervisory framework for covered bonds issued by credit institutions"

This act lays down conditions under which asset-backed bonds issued directly by a credit institution or through a special purpose vehicle subsidiary thereof are recognised by the Bank of Greece as covered bonds by authority of Article 91 of Law 3601/2007 (as amended by article 48 of Law 3693/2008 and article 69 of law 3746/2009).

Covered bonds provide investors with additional collateral in the form of a portfolio comprising high-quality mortgage loans and government bonds, which is strictly separated from the other assets of the credit institution.

Moreover, unlike securitisations of loans, the assets underlying covered bonds do not release credit institutions of the supervisory capital requirements, since the credit risk arising out of these assets remains with the credit institution and is not transferable.

In particular, this Act establishes that:

Credit institutions may issue covered bonds guaranteed by a special purpose company, in which the safety portfolio is transferred. The company is independently responsible for all claims arising from the above mentioned bonds.
The exposures referred to in indents 8b (i), (ii) and (iii) of Section B of the Governor's Act 2588/2007, shall be the only collateral considered eligible for loans.
Non performing loans for 90 days or more shall not be included in the asset pool for the purpose of the monitoring of adequacy.
Specialised inspections should be carried out by independent auditors, during their annual inspections, in the covered bonds issued thereafter.