Executive Summary of the Financial Stability Review: July 2020

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Executive Summary of the Financial Stability Review: July 2020 22/07/2020 - Press Releases

The Executive Summary of the Financial Stability Review was posted today on the Bank of Greece website. The July 2020 Financial Stability Review focuses on developments in the banking sector in the course of 2019, including some references to developments in the first quarter of 2020.

The Bank of Greece's Financial Stability Review is published twice a year by the Financial Stability Department, providing an analysis of financial stability developments in Greece and looking into the risks to and resilience of the banking, insurance and other sectors of the financial system, as well as financial infrastructures (e.g. payment systems, card payment schemes, securities settlement systems, central counterparties, etc.).

In light of the COVID-19 pandemic, macroeconomic projections are surrounded by great uncertainty. Against this backdrop, the banking sector needs to address ensuing challenges to safeguard financial stability and ensure uninterrupted funding to the real economy.

Addressing the elevated stock of non-performing loans (NPLs), which is expected to increase further in the near future reflecting macroeconomic aggregates, is an immediate priority. The existing tools, including the Hellenic Asset Protection Scheme, are in the right direction. Nonetheless, taking into account that the NPL ratio stood at 37.3% in March 2020, the uncertainty regarding the potential further deterioration in asset quality, the low internal capital generation capacity of Greek banks due to their low operating profitability, the anticipated deterioration in the ratio of DTCs to prudential own funds, as well as the pressing need to ensure the financing of the real economy, it becomes apparent that additional initiatives are required, both by banks and the authorities.

Against this backdrop, the Bank of Greece is developing a proposal for a scheme that involves the set-up of an Asset Management Company (AMC) in order to comprehensively tackle Greek banks' troubled assets. Specifically, the proposed scheme will fully utilise banks' existing infrastructures as well as the NPL servicing platforms of third-party providers. Moreover, potential losses related to the existing NPL legacy stock will be covered only by the private sector and not by the Greek taxpayer, up to the level of the minimum capital adequacy requirement. Hence, financial stability is safeguarded and the implementation of this scheme cannot be related under any circumstances to the potential imposition of resolution measures to banks. Lastly, it should be emphasised that this proposal aims not only at capital relief, but also at conducting transactions at market terms with the participation of private investors.

The assessment of systemic risks provides a key tool for the design and implementation of macroprudential policy, which aims at mitigating systemic risks for the financial sector as a whole and complements the microprudential supervision of banks, insurance undertakings and other financial institutions, which focuses on the resilience of specific institutions.

Lastly, this Review includes a Special Feature presenting the existing structure and operation of the Treasury Single Account at the Bank of Greece, as well as the Treasury Account System, which hold their funds with the Bank of Greece, according to the relevant institutional framework.

Related Link: Executive Summary of the Financial Stability Review - July 2020.