Bank of Greece : Executive Summary of the Financial Stability Review – January 2021

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Executive Summary of the Financial Stability Review - January 2021 21/01/2021 - Press Releases

The Executive Summary of the Financial Stability Review was posted today on the Bank of Greece website. The Review is prepared twice a year by the Financial Stability Department and provides an analysis of financial stability developments in Greece. Moreover, it looks into the risks and resilience of the banking, insurance and other sectors of the financial system, as well as financial infrastructures (i.e. payment systems, card payment schemes, securities settlement systems, central clearing counterparties and central securities depositories). The January 2021 Financial Stability Review focuses on developments in the banking sector during 2020, based on information and data available up to the third quarter of 2020, while developments in all other/non-bank sectors are discussed on the basis of data for the first half of the past year.

The COVID-19 pandemic has completely overturned the earlier optimistic macroeconomic projections for 2020 and has significantly affected economic activity, thus driving the economy into a deep recession and threatening financial stability. However, a series of measures (fiscal, monetary and supervisory) that have been implemented by the Greek government, the European Central Bank and the Single Supervisory Mechanism have to a great extent mitigated the impact of the pandemic. Against this backdrop, the Greek banking sector is called upon to address the existing and the new, pandemic-related challenges and, most importantly, to ensure the uninterrupted financing of the real economy.

The canvas of the challenges to be addressed entails three key levels: First, the current very high stock of non-performing loans (NPLs), which is expected to rise further in the period ahead, reflecting the deterioration in the financial condition of households and non-financial corporations as a result of the pandemic, as well as the phasing out of debt moratoria and support measures; Second, the quality of prudential own funds, given the high share of deferred tax credits (DTCs) that is also expected to increase further as banks implement their NPL reduction strategies; Third, the low operating profitability of banks in the context of the current low-for-long interest rate environment, which hampers their internal capital generation capacity.

The existing tools and policy responses, including the Hellenic Asset Protection Scheme (HAPS), are in the right direction. Nonetheless, taking into account that the NPL ratio stood at 35.8% in September 2020, the uncertainty regarding the potential further deterioration in asset quality as a result of the pandemic, the negative or at best 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 clear that additional initiatives are required by both banks and the authorities.

Empirical evidence from various EU jurisdictions indicates that well-designed and professionally managed Asset Management Companies (AMCs) can help speed up the collateral recovery process and prevent unnecessary welfare losses. A systemic solution taking into account the national specificities for the setting up and operation of an AMC, utilising banks' existing infrastructures as well as the existing NPL servicing platforms of third-party providers, would be the most efficient way of swiftly addressing a sizeable part of the asset quality problem affecting the Greek banking sector. A resolution of the legacy stock of NPLs would allow banks to actively manage an increasing amount of distressed exposures due to the COVID-19 pandemic post expiration of the moratoria and, at the same time, restore market confidence, limit the risk of dilution for existing and new shareholders, thus making banks more investible.

Finally, this Review includes a Special Feature discussing the revised EU macroprudential framework introduced by Directive (EU) 2019/878.

Related Link: Executive Summary of the Financial Stability Review - January 2021