Publication of the Financial Stability Report
04/08/2010 - Press Releases
Today, the Bank of Greece is publishing its Financial Stability Report. The Report discusses developments relevant for the stability of the Greek financial system during 2009 and in the first months of 2010. Τhe Report includes boxes that focus on developments in the banking sector in the first months of 2010, the results of the recent EU-wide stress-testing exercise and other relevant issues.
During the final quarter of 2009, and especially during the initial months of 2010, the stability of the domestic financial system came under pressure. Greece’s large fiscal and external imbalances triggered successive credit-rating downgrades of the country’s sovereign debt and its banks, leading to an economic and liquidity crisis. As a result, the Greek financial system experienced acute liquidity stress; the availability of funds in financial markets for Greek banks dried-up and the banks’ deposits declined. The severity of the crisis was exacerbated by a corrosive feedback loop between the financial and real sectors of the economy. Under these adverse conditions, the Greek banking system exhibited remarkable resilience, reflecting, in part, the strong capital base of the system.
The deterioration of Greece’s macroeconomic performance, in 2009 as well as in the first half of 2010 weighed heavily on the financial conditions of non-financial corporations and households. Non-financial corporations showed a marked worsening in their profitability and liquidity ratios, and a decline in their propensity to invest. On the positive side, it is worth noting that a fall occurred in firms’ debt servicing costs while the weighted-average maturity of their liabilities lengthened. Meanwhile, the adverse prospects for income and employment undermined confidence. As a result, households reduced borrowing and consumption. A positive development, however, was the fact that average household indebtedness remains lower than the corresponding EU figure.
THE KEY AGGREGATES OF THE BANKING SECTOR
The shocks in international markets and the domestic economy have adversely affected the profitability and liquidity ratios of the Greek banking sector. For the sector as a whole, pre-tax profits fell substantially in 2009 compared to the previous year (by 93.7% and 59.4% for banks and banking groups, respectively). Banks recorded after-tax losses, while banking groups saw their profits nearly halved relative to the previous year. Provisions for credit risk (impairment charges) absorbed more than one-third of operating income, having a strong negative impact on profitability.
In the first quarter of 2010, there were further declines in banks’ profitability and in the quality of banks’ loan portfolio; non-performing loans, as a proportion of total loans (NPL ratio), rose to 8.2% in March (December 2009: 7.7%, December 2008: 5.0%). NPL ratios increased across all categories of loans, but most sharply in the case of consumer loans.
In the light of the severe liquidity strains faced by Greek banks in 2009 and early 2010, Greek banks raised significant amounts of liquidity from the Eurosystem. Moreover, with a view to further supporting liquidity, the Greek government extended (until the end of 2010) the deadline for the use of non-allocated funds under the liquidity support measures of Law 3723/2008, while Law 3845/2010 expanded the bank-bond guarantee scheme by €15 billion.
A very positive development in the course of 2009 was the improvement in the capital base of Greek banks; this improvement stemmed mainly from market-based funding, internal financing (retained profits and non-distribution of dividends for the financial year 2009), as well as the issuance of preference shares. For the sector as a whole, both the capital adequacy ratio (banks: 13.2%, banking groups: 11.8%) and the Tier 1 ratio (banks: 12.0%, banking groups: 10.6%) stood higher compared with the average of a sample of medium-sized banking groups in the EU. At the end of the first quarter of 2010, the capital adequacy ratios remained at 2009 levels.
In July 2010, an EU-wide stress test exercise was conducted in which the six largest Greek banking groups participated in a total of 91 EU banks. The stress test covered the period 2010-2011 and comprised several scenarios, including a benchmark scenario, which is broadly in line with current macroeconomic projections and forecasts, and an extremely adverse scenario, which assumes a significant further worsening of macroeconomic conditions and a sovereign risk shock.
The results of the exercise showed that, under the benchmark scenario, the Tier 1 ratio of all six Greek banking groups exceeded the 6% threshold that was agreed as a benchmark solely for the purposes of this exercise. Clearly, this threshold should by no means be interpreted as a regulatory minimum, which, in fact, is 4%.
Under the extremely adverse scenario, despite Tier 1 ratio declines of between 3 and 7 percentage points, the high starting level enabled five of the six Greek banking groups to pass the test (Hellenic Postbank: 10.1%, Alpha Bank: 8.22%, Eurobank EFG: 8.17%, National Bank of Greece: 7.4%, Piraeus Bank: 6%). For ATEbank, the Tier 1 ratio fell to 4.36% at the end of the scenario horizon, indicating a shortfall of €243 million. For all six banking groups, the results of the stress test under the extremely adverse scenario show a net capital buffer of €3.3 billion over the amount corresponding to the defined 6% threshold of the Tier 1 ratio.
The Bank of Greece will closely monitor the developments and will ensure that necessary steps are taken to increase capital adequacy of banks where needed. The establishment of a € 10 billion Hellenic Financial Stability Fund provides a safety net for banks’ capital adequacy. In addition, € 1.2 billion is still available through the issuance of preference shares (Law 3723/2008).
ASSESSMENT – CONCLUSIONS
At the present juncture, Greek banks should take initiatives in the direction of strategic alliances. Restructuring in the banking system would help Greek banks acquire a critical mass that would allow them to benefit from economies of scale and regain access more quickly to international money and capital markets. Moreover, Greek banks need to proactively adapt to the changing financial environment by:
• maintaining capital buffers above the regulatory minimums;
• establishing sufficient impairment charges;
• rationalising operating costs; and
• managing available sources of funding flexibly and prudently.
It is expected that pressures on financial stability will ease in the coming months, with the return of the market confidence, stemming from the continued implementation of the government’s fiscal and structural adjustment program, the implementation of the trilateral support mechanism for the Greek economy, and the adjustment of the financial system to the challenges and opportunities of a changing environment.
Chapter I (“Executive summary”) of the Financial Stability Report is available on the website of the Bank of Greece.