Ομιλία του Διευθυντή της Δ/νσης Εποπτείας Πιστωτικού Συστήματος κ. Παναγιώτη Κυριακόπουλου "Ενέργειες της ελληνικής εποπτικής αρχής για την αντιμετώπιση του πιστωτικού κινδύνου" στο Ετήσιο Συνέδριο της FEBIS στην Αθήνα
22/09/2005 - Ομιλίες
Good morning Ladies and Gentlemen,
A. I would like to thank the organisers for inviting me to
participate in this important event, as I consider business information services
a key and integral factor of risk management. In my brief intervention I will
state my views on the actions of Greek banks, and the Bank of Greece (BoG) as
the competent supervisory authority, concerning the management of credit risk.
I think that two issues are closely linked to this:
1. The first issue is the strong credit expansion, mainly to
households in Greece, although Greece still has one of the lowest rates of
household indebtedness in relation to GDP in the euro area (33% against an
average of 55%).
While these developments are also evident in the EU and the
euro area, in the case of Greece some specific structural factors exist, such as:
(i) the strong GDP growth in recent years,
(ii) the reduction of Bank of Greece reserve requirements on
credit institutions in order to comply with the euro area Monetary Policy, a
factor that increased credit institutions' liquidity,
(iii) the reduction of nominal and real interest rates, which
has reduced the cost of borrowing to historically low levels in the euro area,
and more significantly in our case the fact that interest rates were a multiple
of interest rates of the core European countries and
(iv) the increase in competition, following the recent
abolition of the remaining restrictions on credit, such as the ceiling applying
to non-collateralised consumer loans, which took place not earlier than 2003.
The cumulative effect of these developments may have an
impact on credit risk management requirements.
At the same time, a discussion is held at the EU and
euro area level (Banking Supervisory Committee - BSC and Committee of European
Banking Supervisors - CEBS) about the role of competition on the possible
loosening of credit standards, the possible correction of housing prices in some
countries, the ability of households to service their liabilities and the
adequacy of provisions under different macroeconomic and credit cycle scenarios.
2. In this context, the second related issue is the Basel II
Αccord and the need to align supervisory measures with the risks taken by banks.
3. Having presented the changes taking place in the banking
landscape and affecting credit risk, I would like to briefly review the
regulatory context in which banks and supervisors work and then elaborate on the
challenges that they face.
B. Αs already known, the overriding objective of the
Basel II Accord is to establish a more risk-sensitive capital requirements
regime, by aligning the regulatory capital requirements with the underlying
risks run by banks and providing institutions with incentives to improve their
risk management systems.
For today's presentation, suffice it to focus on the three
approaches of Pillar I and the challenges posed thereby in the calculation of
the minimum capital that each bank should hold against credit risk.
1. The Standardised Approach is quite similar to the
Basel I method, but more risk-sensitive, since it introduces the differentiation
of risk weights on the basis of the category of the obligor and his
creditworthiness, as assessed by recognised rating agencies. It also recognises
the use of credit risk mitigation, in the form of collaterals (e.g. various
types of securities), which leads to the reduction of the undertaken credit risk.
2. The Foundation Internal-Ratings-Based Approach (F-IRB)
relies on the internal ratings systems of banks for classifying customers at
rating categories on the basis of the probability that they will not honour
While in F-IRB the Probability of Default (PD) is estimated
by the bank, the Loss-Given Default (LGD), the Exposure at Default (EAD) and the
Maturity (M) of the exposure are set by the framework.
3. The Advanced Internal-Ratings-Based Approach (A-IRB) is
actually an extension of the F-IRB, allowing the credit institution in question
to calculate (besides the PD) the parameters of the Loss-Given Default, Exposure
at Default and Maturity.
4. The use of the IRB Approaches is subject to supervisory
approval under strict conditions to ensure that the systems used are of the
The new framework is designed for broad application, as it
satisfies different levels of requirements, by providing the three alternative
approaches, which incorporate different levels of sophistication.
It is, therefore, not only an opportunity, as is often said,
but also a necessity for credit institutions, irrespective of their size and
complexity, to upgrade their risk management systems.
C. Moving to the challenges posed by the new framework, a
number of issues have to be resolved before Pillar I can be efficiently applied.
The three most important and partly interrelated issues in this respect are:
1. First of all, with regard to the choice of the approach
that best suits each bank, the Bank of Greece had to make a decision on whether
it would impose the adoption of a specific approach to the supervised credit
institutions depending on predetermined criteria, like the approach applied in
the USA, or only set the minimum requirements for upgrading Risk Management
Systems, irrespective of which approach credit institutions would choose to
The Bank of Greece (BoG), both in the dialogue with banks and
in its 6 consultation papers, stressed, on the one hand, that each credit
institution would have the discretion to adopt the approach it prefers and, on
the other hand, that no deviation from the best practices of risk management
would be condoned.
However, the BoG is obliged to encourage banks to move to the
IRB approach more quickly, as it feels that this approach will lead to a
further improvement in their risk management, thus strengthening their
competitive position and especially their ability to successfully address risk
2. The second challenge I would like to address is the
availability and suitability of the data used for the calculation of the
parameters of PD and LGD.
It is certainly not an easy task for banks and authorities to
establish a reliable relationship between capital requirements or Non-Performing
Loans (NPLs) and the economic cycle in Greece, because of the relatively recent
deregulation of consumer lending as well as the fact that Greece has not
experienced a full economic cycle since the onset of the financial
liberalisation in the mid-90s.
This task becomes further complicated when calculating
downturn LGDs, as required by the new framework.
An issue closely connected with the collection of information
is the further enhancement of the credit bureau. Having recognised the
importance of this issue, amongst many new measures, new categories of loans (mortgages)
will be reported in the very near future. In addition, some progress has been
made in finding the appropriate balance between the protection of customer
rights and the need to enhance the ability of banks to assess customers'
The above highlight the difficulties Greek banks face in
collecting information for their rating systems. However, to be fair, I have
to say that other countries too face similar problems, underestimating, to some
degree, expected losses. It is also true that data availability touches upon
the availability of ratings for corporations.
In the context of the new capital adequacy framework, credit
institutions may use external credit assessments to determine the risk weight of
their exposures, provided by external credit assessment institutions (ECAIs)
that are recognised as eligible for that purpose by the competent supervisory
This recognition is only granted if the competent authorities
judge an ECAI to meet the criteria of objectivity, independence, ongoing review
of the its methodology as well as transparency and disclosure, credibility and
market acceptance of the ECAI's individual credit assessments.
Given the low number of rated firms in the EU and especially
in Greece, the BoG would welcome the operation of national agencies fulfilling
the criteria of the Capital Requirements Directive (CRD) and is committed,
within the CEBS (the Lamfallusy 3 Level Committee of supervisors) convergence
plan, to ensure common standards that will allow free access to new agencies.
3. To wrap up the challenges that banks face with regard to
the Basel II implementation, I will elaborate on the third issue of the
establishment of the credit risk management system and practices.
In recent years, most of Greek banks have taken major steps
towards upgrading their credit measurement and management systems, as they
have realised that the benefits of Basel II offset the implementation cost,
through the full implementation of more advanced approaches is a difficult
and lengthier process than anticipated. Several banks have already
introduced credit scoring models for the approval of applications for consumer
loans, while some banks have developed probability-of-default models.
In particular the issues that banks have been addressing are:
The design of their rating systems and, more specifically,
technical characteristics such as expanding the risk rating grades in order
to avoid granularity. The majority of Greek banks (accounting for 76.6% of
the total commercial bank assets) have already adopted 10 grades in their
rating systems, while the remaining ones are moving in this direction,
making all the necessary adjustments.
The establishment of the criteria and methodology of
classification according to the category of each portfolio, the use of
internal ratings and the incorporation of financial parameters. Banks
representing 53% of the total commercial banking assets (at 31 Dec. 2004)
use external software to rate large corporations.
Banks also use scorecards to either approve or reject an
application for loan but there may be some room for improvement in this area,
Besides the adoption of the necessary methodologies,
another significant issue is the establishment of the required IT facilities.
This poses one of the most important practical challenges, as
IT infrastructure does not only cover the collection, storage and accessibility
of the data needed for PD and LGD estimation, but also reporting requirements.
This enables banks' risk management and internal audit
functions and of course helps supervisors to fulfil their task of validating
credit management systems as a whole, while it covers the information
requirements set by Pillar III.
Regarding risk culture, what will undoubtedly play a very
important role for the acceptance or not of a bank's system will be its
systematic use. In other words, the minimum expectations of the BoG are that the
systems used for capital requirements will also be used in approving credit
lines or loans, setting limits, measuring and reporting credit risk, making
provisions and, where appropriate, pricing.
D. From the supervisor's point of view, it is clear
that banks' risk management has improved significantly over recent years, but
the degree of improvement is uneven across banks, including cooperative banks.
We are well aware of this factor, as well as that fierce
competition will possibly result in some volatility in credit standards, which
will most likely worsen loan quality if the current high rates of economic
The Bank of Greece has already responded by taking
some proactive measures. More specifically:
It has increased the coefficients of supervisory
provisions in 2003 and again in 2005. The issue of supervisory provisions
has been extensively discussed. We believe that, especially for banks that
will stay in the standardised approach, the buffer that those provisions
offer should remain. For banks that will move to the more advanced
approaches, supervisory provisions should not differ from their expected
losses as estimated by their systems, but some buffers may be necessary
until the system has been tested in real life.
In addition, the BoG encourages banks to maintain a
buffer above the minimum capital adequacy requirements, in order to shield
their net positions against the potential increase of credit risk. Moreover,
it has imposed a required capital adequacy ratio higher than the minimum of
8% (up to 3 p.p. for some banks) when the risk profile of individual banks
had made this measure necessary. In this respect, in principle and not in
the details, we have already adopted the Pillar II approach of Basel II.
In the spirit of the new framework, which requires
individualised supervision, the BoG:
monitors and validates more closely the level of
sophistication of banks' risk management systems with targeted on-site
inspections and reviews banks' internal control systems and their internal
policy on loan classification (for instance the cut-off points in granting
new loans) and the parameters used (income of borrowers in relation to their
encourages banks to improve data collection and
statistical methods, so that they move from the assessment of transactions
to that of borrowers , and
has initiated an on-going dialogue with the Risk
Management Units of each bank, in particular for sectoral or large
individual exposures, taking into consideration stress-testing exercises.
On the issue of mortgages, I should emphasise that strong
competition may induce banks to loosen their credit standards by increasing the
LTV ratios to a level that could be no more in line with the favourable, lower
than the 8%, minimum capital requirements prescribed by Basel I (4%).
E. Concluding, I would like to convey a clear message:
Despite the considerable improvement in the risk management of banks,
complacency for what has already been achieved over recent years may be regarded
as an additional risk factor.
The clear improvement of risk management may not be
sufficient, given that at the same time the ever growing complexity of bank
products and some credit or market risk factors oblige all of us to keep pace
with the new environment and dynamic developments.
For example regarding the credit derivatives and hedge funds,
greater effort is needed by those banks that are very active in this field to
track the risk that each one faces. However, as Greek banks have not resorted to
these instruments to the same extent as many foreign banks, the situation in
Greece is not, for the time being, a matter of concern.
In addition, not only factors such as oil prices may affect
the risk profile of banks, but also other factors that may emerge, such as:
- the fact that the risk profile seems more likely to
deteriorate when the economic environment is becomes unfavourable (procyclicality
- the narrowing spreads due to competition resulting from low
interest rates and ample liquidity, which may induce banks, by hunting the yield,
to misprice some risks.
- in the medium to long term, possible difficulties to
increase and maintain the interest income, a fact which is also evident in other
However, I believe that, as in the past, Greek banks
have demonstrated their ability to adapt to challenges and that they will also
successfully address these issues on a proactive and forward looking manner, by
building on the improvement already made and further enhancing their risk
management to the benefit of financial stability and economic growth. Most of
the banks with substantial portfolios and cross-border presence will be ready,
in the time frame provided for in the Capital Requirements draft Directive, to
adopt the IRB approaches, making the required additional effort in adapting
Let me thank you for your attention and wish you success in
the goals of the conference.