Executive Summary of the Financial Stability Review: November 2023

08/11/2023 - Press Releases

- Heightened geopolitical risks, persistent inflationary pressures, economic growth slowdown and the risk of a sharp repricing of assets in international money and capital markets keep the risks to financial stability high.

- The Greek sovereign’s return to investment grade mitigates the risks to the financial system and the outlook of the Greek banking sector is positive.

- Banks’ profitability is improving, while the implementation of their strategies for resolving the legacy stock of non‑performing loans (NPLs) continues.

- The banking sector’s capital adequacy is satisfactory, but banks should further shore up their capital buffers.

- The liquidity and funding conditions of the Greek banking sector improved further as a result of increased customer deposits and despite partial repayment of European Central Bank (ECB) funding.

The Executive Summary of the Financial Stability Review was posted today on the Bank of Greece website. The Review is published twice a year by the Financial Stability Department.

The Review assesses financial stability developments in Greece, identifies the main systemic risk factors for the domestic banking sector and other sectors of the Greek financial system and analyses the operation of financial market infrastructures (i.e. payment systems, payment cards, central securities depositories and central counterparties).

The November 2023 Financial Stability Review focuses on developments in the banking sector during the first half of 2023. The Review includes two Special Features, which discuss:

(a) key concepts of cryptoassets and the crucial events that affected their ecosystem in recent years; the risks from cryptoassets to financial stability; and recent developments in the relevant European and international regulatory framework; and

(b) the pan-European stress tests for 2023, including the scenarios and methodology changes adopted by the European Banking Authority (EBA) in comparison with the 2021 stress tests, as well as the result of the exercise.

The banking sector is in a much better position than in the past to withstand potential shocks. However, persistently high inflation, higher key interest rates and slower economic growth are testing the resilience of firms and households and may lead to the creation of new NPLs. At the same time, high interest rates and market volatility entail risks to non-bank financial institutions, with potential second-round effects on banks.

The ratio of non-performing loans (NPLs) to total loans fell marginally to 8.6% in June 2023, from 8.7% in December 2022. It should be noted that all four significant banks have now reached their single-digit NPL targets, with one of them below 5%. However, actions aimed at resolving the legacy stock of NPLs and converging with the European average (June 2023: 1.8%) should be continued.

Banks’ core profitability was strong. In the short term, the impact of key interest rate hikes on banks’ net interest income is positive, as the majority of their loans carry floating rates. However, in the medium term, this effect may be dampened by banks’ higher funding costs as a result of the gradual rise in deposit rates, on the one hand, and the increased cost of issuing bonds to raise liquidity and meet regulatory requirements, on the other hand. At the same time, in an environment of slowing economic growth, achieving sound credit growth and maintaining the current high profitability ratios will be a challenge.

The capital adequacy of Greek banking groups declined slightly and the quality of their prudential own funds remains low. However, increased profitability creates favourable conditions for internal capital generation. In June 2023, the Common Equity Tier 1 ratio (CET1 ratio) on a consolidated basis dropped to 14.2%, from 14.5% in December 2022, mainly due to the negative fully phased-in impact of International Financial Reporting Standard 9 (IFRS 9) and the increase in risk-weighted assets. Similarly, the Total Capital Ratio (TCR) fell to 17.3%, from 17.5%.

High uncertainty and the risks prevailing in the global financial environment leave no room for complacency. The upgrade of the Greek government’s credit rating to investment grade, the government’s low financing needs over the next two years, as well as the strengthening of the banking sector’s fundamentals largely mitigate risks. However, a sharp deterioration in international financial conditions could cause shocks with adverse effects on the financial situation of firms and households, as well as on the Greek banking sector. Therefore, it becomes all the more important to continue the consolidation effort and to further strengthen the fundamentals of the financial system, while at the same time implementing appropriate micro- and macro-prudential measures to enhance and safeguard financial stability.

Financial Stability Review - November 2023