Financial Stability Review: May 2023
11/05/2023 - Press Releases
- The persistence of inflationary pressures and geopolitical tensions, the risk of a sharp repricing of assets in international money and capital markets, as well as the recent turmoil in the US and the Swiss banking system, have considerably heightened risks to financial stability.
- The Greek banking sector is now clearly better placed than in the past to absorb international market shocks.
- The implementation of banks’ strategies for resolving the legacy stock of non‑performing loans (NPLs) helped all four significant Greek banks to achieve a single‑digit NPL ratio.
- The banking sector’s capital adequacy improved further to a satisfactory level, above the regulatory minimum, as banks posted profits after two loss‑making years.
- The liquidity of the banking sector improved, as a result of increased customer deposits and despite voluntary partial repayments of funds raised through the ECB.
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 May 2023 Financial Stability Review focuses on developments in the banking sector during 2022. The Review includes five Special Features, which discuss more specialised issues:
(a) the commercial real estate market and its relevance for financial stability;
(b) developments in the structure of the Greek banking sector and major changes in the past twenty-five years;
(c) borrower-based measures, a special category of macroprudential policy measures targeting borrower indebtedness;
(d) the recent turbulence in the US and the Swiss banking system, leading to the failure of three US banks and the forced acquisition of the second largest Swiss bank; and
(e) the turmoil in energy markets during 2022, which led the European institutions to adopt a market correction mechanism to limit excessive gas prices.
A potential further deterioration of geopolitical risks; persistently high levels of inflation; gradually emerging vulnerabilities in the financial system of the European Union, particularly in the commercial real estate market, as well as the risk of new exogenous shocks to money and capital markets, highlight most emphatically the volatility of the international financial environment. Against this background, the Greek banking sector should swiftly adapt by addressing the prevailing challenges, including further improving asset quality and capital adequacy, and achieving sustainable profitability.
The NPL ratio (December 2022: 8.7%) declined, although it remains significantly above the corresponding European average. Therefore, banks should step up their efforts to achieve further convergence. Moreover, inflation and a slowdown in economic activity might affect the financial condition of non‑financial corporations and households, leading to a new wave of NPLs.
Greek banks’ return to profitability in 2022 is a positive development, while a further increase in operating income is expected in 2023. The ECB interest rate hikes are set to boost banks’ net interest income in the short term, given the very large share of floating-rate loans. This impact could be muted in the medium term since banks’ funding costs are likely to rise as a result, on the one hand, of gradual increases in deposit rates and, on the other hand, of higher bond issuance costs to shore up liquidity and meet capital requirements.
Capital adequacy of banking groups strengthened considerably in 2022, mainly on the back of an increase in banks’ prudential own funds by means of internal capital generation and, secondarily, issuance of additional capital instruments. In particular, the Common Equity Tier 1 (CET1) ratio on a consolidated basis rose to 14.5% in December 2022, from 13.6% in December 2021, and the Total Capital Ratio (TCR) to 17.5%, from 16.2% respectively.
The recent turbulence in the US and the Swiss banking system requires vigilance on the part of all stakeholders and has brought to the fore the need to complete the banking union. The European Commission’s recent proposal to revise the crisis management framework is a step in the right direction and should – among other things – be supplemented by the establishment of a European Deposit Insurance Scheme (EDIS). At the same time, prudent economic policies are crucial in order for the Greek economy to be insulated against risks and the Greek government to achieve investment grade, the positive effects of which would further consolidate confidence in the Greek economy and strengthen financial stability.
Related link:
Financial Stability Review, May 2023