The Changing Structures of European Banking: The Greek Experience
14/02/2003 - Speeches
The Changing Structures of European Banking:
The Greek Experience
Address by Nicholas C. Garganas
Governor of the Bank of Greece
14 February 2003
at the Bulgarian National Bank
Ladies and Gentlemen,
It is a great pleasure to talk to you today about the changing
structure of European banking and, in particular, the Greek experience. In many ways the
Greek experience is especially relevant for the accession countries. Greece is the
most-recent member of EMU, and the rapid transformation of the economy, including the
banking system, can provide valuable lessons for the accession countries.
Central bankers have a special interest in the working of the financial
system. Financial markets throughout the world are becoming increasingly integrated and
banks are the workhorses of financial markets. The further integration of the European
banking and financial system is in the interests of banks, the European Central Bank, and,
most importantly, all the citizens of Europe. For banks, further integration carries with
it the liquidity benefits of deeper and broader markets, and lower costs, especially when
making cross-border transactions. It also brings access to the latest technology and
know-how. For the European Central Bank, integration enhances the efficient and consistent
implementation of its single monetary policy. For Europe’s economic agents, it means
increased opportunities for channeling funds from savers to investors. An efficient
allocation of capital is a precondition for robust growth and a higher standard of living
in the medium term. Let me discuss, therefore, developments in financial markets in the
The remarkable pace of integration of world financial markets has been
one of the most profound and far-reaching economic developments of the late twentieth and
early twenty-first centuries. The integration of financial markets worldwide has had
several origins, including the revolution in communications and information technologies,
macroeconomic stabilization and policy reform, the deregulation of domestic financial
systems, and the removal of restrictions on capital-account transactions. In the European
Union, two additional factors have underpinned the integration of financial markets - -
first, advances in creating a common regulatory framework across the EU as part of the
effort to complete the Internal Market in financial services and second, the adoption of
the euro. The introduction of the euro has eliminated exchange-rate risk as a source of
fragmentation in the EU financial system. Deeper integration in the euro area is reflected
in more-homogeneous financial products, a wave of consolidation among intermediaries and
exchanges, and the emergence of new, innovative financial products and techniques. Here
are some examples.
- With the creation of TARGET, the efficient cross-border real-time gross settlement
system, an integrated money market exists for liquidity transfers in euro. There is
virtually full convergence in very-short-term interest rates across the euro area, with
essentially no differences in rates wherever the funds are exchanged.
- There has been a significant increase in integration of market activities at the
wholesale level. The corporate finance markets for major customers have become highly
integrated. A high level of integration has also occurred in wholesale asset management,
with investments increasingly diversified across borders.
Meanwhile, economies-of-scale in area-wide activities have led to a
concentration of business via mergers and acquisitions. The ECB reports that the top ten
intermediaries typically control 60 per cent to 70 per cent of European investment banking
markets; the top three control one-quarter to one-third. There appears to be less and less
room for medium-sized intermediaries, which have been faced with the choice to compete at
the European level or to concentrate on retail business in the domestic market. Many
medium-sized intermediaries have chosen the second option.
One reason they have done so is that domestic markets have remained
fragmented so that there is less competition than at the wholesale level. At the retail
level, national banks maintain an important competitive advantage over their foreign
counterparts because they have better knowledge of local conditions, possess branch
networks, and have cultivated well-established relations with local customers. When
entrusting their savings, depositors want to make sure that they are in safe hands.
Knowledge of the bank and the national legal system provide powerful incentives to deposit
in the local banks; this is what economists call “home-country bias”. In these
circumstances, small and medium-sized national banks have tended to concentrate on
domestic consolidation and have expanded cross-border mainly by entering into agreements
with banks in other countries in order facilitate the supply of services to their largely
In sum, the picture that emerges from developments in the euro area is
one of a fully-integrated money market, a highly-integrated market for
corporate/investment banking services, and a fragmented banking market at the retail
What can be done to reduce market segmentation in the retail banking
market? The challenge is to remove institutional and economic factors that raise the cost
of cross-border operations. Further integration will require harmonization of accounting
and tax regimes, and legal frameworks, and the acquisition of the necessary technical
infrastructure for handling cross-border holdings and settling securities. The costs of
regulatory obstacles are identified in the Financial Services Action Plan, issued by the
European Commission. The Action Plan lists priorities and time-scales for legislative and
other measures to remove these obstacles. To date, 30 of 42 measures contained in the
Action Plan have been completed. I hope the remaining obstacles identified in the Action
Plan will be removed by the scheduled deadlines.
Against this backdrop of developments in European-wide banking, let me
turn the banking situation in Greece. In a nutshell, the past 15 years or so have seen a
seachange in Greece’s banking system. The system has been transformed from one that was
highly regulated to one that is entirely unregulated, and the capital account has been
opened so that there is free movement of funds into and out of the country.
A number of changes that have taken place in Greece occurred prior to
Greece’s entry into the euro zone while the adoption of the euro by Greece has
accelerated other changes. How has adoption of the euro directly affected the Greek
banking system? For one thing, the pricing of banking products and services has become
more transparent, enhancing competition. This increased competition, along with the
stability and low-inflation regime provided by the euro, - - and its guardian, the
European Central Bank - - has led to a narrowing of the spread between Greek lending and
deposit rates of more than 3 percentage points over the past 4 years. For another,
however, a source of income generation from foreign exchange transactions has been lost.
This loss has added to the drive for banks to generate new products and seek new
Another characteristic of the changing landscape in recent years has
been the withdrawal of the state from commercial banking. Privatisation has reduced the
number of directly or indirectly state-controlled banks from 10 in 1995 to 3 - -
Agricultural Bank, General Bank and the Postal Saving Bank - - today. Yet, the size of the
Greek banking industry and of the individual banks, even after the recent mergers and
acquisitions, remains small relative to those in most of the other countries participating
in the euro area. Hence, Greek banks have tried to reinforce their positions in the
domestic market and strengthen their presence in the Balkan area.
In the increasingly-competitive euro-area environment, Greek banks have
made concerted efforts to change their ways of conducting business and transform their
organizational structures. They have proceeded with a series of mergers and acquisitions.
Since 1996, sixteen mergers and takeovers have occurred. Banks’ balance sheets have been
restructured to make their financial positions sounder. Banks have improved their capital
bases by raising funds from the capital market. Greek banks have formed alliances with
foreign banks; Eurobank and Deutsche Bank formed an alliance, as have Commercial Bank with
Credit Agricole and Piraeus Bank with the ING Group. In the light of Greece’s
geographical position and its economic links with the Balkan countries, Greek banks, as I
mentioned, have expanded activities in these countries. As you know, in recent years Greek
banks have strengthened their links with Bulgarian banks.
Greek banks have also rationalized their expenses. Although Greek
banks' expenses relative to their total assets remain above the average figure for the
euro area, between 1999 and 2001, they fell nearly thirteen per cent - from 2.7 percent to
2.4 per cent.
Moreover, Greek banks have been offering an expanding array of new
products and services. Many of these products and services are attractive to the household
sector. Strong competition among banks in serving this sector has contributed to a
reduction in interest rates and a rapid increase in consumer and household loans. Almost
60 per cent of total credit expansion in the past year was accounted for by household and
In the light of the foregoing developments in both the EU financial
market, in general, and in Greece’s banking sector, in particular. Let me now turn to
the crucial role of supervision. The soundness of the financial sector plays a key role
for monetary-policy implementation and transmission, macroeconomic stability, and economic
development. Financial-sector soundness can be ensured through a strong supervisory
framework and effective corporate governance. These factors will be important in accession
countries as future financial development in these countries is likely to involve
significant growth in banks’s balance sheets and the widening and deepening of financial
In Greece, the Bank of Greece is responsible for the supervision of the
banking system and for monitoring developments to ensure the soundness of the system. In
the latter connection, in recent years the Bank has undertaken a number of measures. In
the last two years alone, the following measures have been introduced.
- The Bank has increased the minimum initial capital for establishing a bank in Greece
(from 11.7 million euros to 18 million euros).
- Under certain conditions, it has allowed banks to use internal models for calculating
their capital needs to cover market risks.
- It has reduced to six months (from 12 months) the period allowable for a bank loan not
to be serviced and during which banks can continue writing interest on this loan.
- It completed and codified in a single text the relevant rules and provisions concerning
transparency of terms and procedures of transactions between banks and their customers.
Greece's experience can shed light on the importance of a sound
financial system and the role of supervision. Consider, in this connection, the following
example of the role of supervision in Greece. Participation in EMU has provided Greece
with a stable economic and financial environment. It has also provided fertile ground for
high credit growth, particularly in the household sector. For example, the annual rate of
increase in consumer loans reached a peak of about 52 per cent in June 2001, before
decelerating to 24.2 per cent this past December. Several factors have been responsible
for the high rates of growth of bank lending, including the relatively-high rate of growth
of the Greek economy, the convergence of Greek lending rates to those in the rest of the
euro area, increased competition among banks, especially with regard to extending credit
to households, and the release of commercial bank funds from the Bank of Greece because of
the harmonisation of reserve requirements in the Eurosystem.
Although credit growth has decelerated significantly over the past year
and a half, as part of its supervisory role the Bank of Greece has been closely monitoring
the situation. Last month [in January], the Bank introduced stricter provisioning rules;
banks are now required to increase by 10 percentage points (in two installments) their
provisions on loans that are not serviced for over 12 months. In addition, the Bank is, for
the time being, maintaining the relevant limits that apply to consumer loans. To enhance
its oversight function, the Bank has commissioned a survey of households' indebtedness.
The results of this survey will help determine whether these limits should be removed.
Supervision of the banking system is always important in ensuring
stability of that system. Supervision, however, can have added importance in a monetary
union because, in a monetary union, there is a single monetary policy that applies to all
countries. In the absence of a national monetary policy, the responsibility for
maintaining an economy’s competitiveness falls on other areas, including on fiscal
adjustment and structural reform. Yet, the rapid credit growth in Greece, if left
unconstrained, would have had implications for Greek competitiveness. In such conditions,
there was a clear need for action. This situation explains why the Bank of Greece
introduced stricter provisions.
Bulgaria, with its currency board arrangement, faces similar
constraints on the ability to use a national monetary policy. Fortunately, the banking
sector in Bulgaria is well-regulated and well supervised.
Let me now say a few words about the financial sectors in accession
countries. I will focus on accession countries as a group and refrain from
Over the past decade, a remarkable transformation has occurred in the
financial sectors of the accession countries. Considerable progress has been made in
restructuring and consolidating the banking sector though the liberalisation of markets,
privatisation of state-owned banks, and the opening of the banking sector to foreign
ownership. These broad developments parallel changes that have been taking place in
Yet, for most accession countries, particularly those in central and
eastern Europe, the level of financial intermediation is relatively low and the provision
of bank financing represents a much smaller share of GDP than in the euro area. To provide
some context, bank assets in the euro area amount to about 265 per cent of GDP. In Greece,
which is still in the catching up phase, the comparable figure is over 150 per cent of
GDP. In contrast, according to data reported by the ECB, banks in most accession countries
have assets amounting to between 30 per cent to 100 per cent of GDP. This relatively-low
level of financial intermediation can serve as an obstacle to credit institutions’
channeling financial savings into investment. Additionally, although the banking industry
in accession countries is widely considered stable and sound, the presence of structural
weaknesses and inefficiencies – for example those reflected in the continued high
spreads between lending and deposit rates or the relatively large proportion of bad loans
in some countries - requires that an extra effort be made to consolidate the financial
sector in order to avoid adverse future implications.
In these circumstances, and in view of the key role of the banking
system in invigorating and broadening economic growth and improving welfare, it seems
crucial that accession countries complete a number if structural reforms, including the
implementation of a well-functioning regulatory and legal framework, corporate
restructuring, and improvements in corporate governance. Ongoing reforms in the euro area
make such changes in the accession countries all the more necessary, because they increase
the gap between current practices in those countries and in the euro area.
In conclusion, let me stress that developing the size, depth, and
efficiency of the banking sector will help accession countries to develop their full
growth potential. The resulting increase in competition, combined with sound supervisory
practices, will lead to lower costs of funds and financial services, higher rates of
return to investors, and a wider array of financial products.
The Greek experience illustrates the effects of European integration on
a national banking system. As I have discussed, the most notable effect has been the
increase in competition, whether through privatisation, the rationalisation of banks’
expenses, or the restructuring of their balance sheets to make banks’ financial position
sounder. Through its supervisory functions, the Bank of Greece play a vital role in
maintaining the soundness of the banking system, helping to ensure the ability of Greek
banks to reap the full potential benefits of participation in Europe’s single currency
The Greek banking sector continues to undergo change as it adapts to
the new regime of the euro zone. Despite the substantial progress made in recent years by
the accession countries, their financial sectors will need to undergo further significant
changes in the future. By so doing, their financial sectors will be able to fully support
economic growth, and, hence, the process of real convergence to euro-area levels.
Ladies and Gentlemen, thank you for your attention.