Financial Stability Review: December 2021

02/12/2021 - Press Releases

- The strong economic recovery in Greece in 2021, coupled with accommodative monetary and fiscal policies to mitigate the impact of the COVID-19 pandemic, contributed to improved liquidity conditions.

- Banks successfully continued their efforts to clean up their loan portfolios. This lays the ground for banks to resume their financial intermediation role and thus contribute to sustainable economic growth.

- Important challenges persist: the legacy stock of non-performing loans still on bank balance sheets amidst the fourth wave of the pandemic; the low quality of Greek banks' prudential own funds, given the large share of deferred tax assets; and low operating profitability.

- Over the medium term, the financial system will have to deal with the impact of climate change, entailing physical and transition risks.

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 developments, identifies the main systemic risk factors for the domestic banking sector and the other sectors of the financial system, and analyses the functions of financial infrastructures (i.e. payment systems, payment cards, central securities depositories and central counterparties). The December 2021 Financial Stability Review focuses on developments in the banking sector during the first half of 2021. With specific regard to liquidity and market risks, the Review covers developments up to September and November 2021, respectively. The Special Features included in the publication focus on more specific issues, such as climate change and its interaction with the banking sector; the bank crisis management framework; the regulatory sandbox of the Bank of Greece; and the impact of big techs on the financial system and the ensuing regulatory challenges.

In 2021, economic activity in Greece recovered strongly, while the outlook for economic growth in both 2021 and 2022 remains very optimistic. Medium-term growth will greatly benefit from both the multiannual financial framework 2021-2027 and the European recovery instrument Next Generation EU (NGEU), which are expected to provide funding for major structural reforms and investment projects. Against this background, the banking sector should rapidly adapt in order to perform its intermediation role and ensure a smooth flow of credit to the real economy.

The high stock of non-performing loans (NPLs), along with a potential new wave of defaults after pandemic-related measures to support borrowers are fully lifted, remains the greatest challenge facing the banking sector. The actions taken so far to tackle the NPL problem have definitely contributed to a substantial reduction in the NPL stock. However, the NPL ratio (NPLs to total loans) remains high (June 2021: 20.3%). The quality of Greek banks' prudential own funds, structurally low profitability and the impact of climate change also represent risks over the medium term.

Liquidity conditions in the banking sector continued to improve in 2021. Characteristically, private sector deposits increased by €28.6 billion between March 2020 and September 2021, which is reflected in the considerable growth of private sector savings as a percentage of GDP to roughly 16%, from 6% in 2019. However, low operating profitability and increased loan-loss provisions for credit risk impacted on Greek banking groups' capital adequacy; as a result, the Common Equity Tier 1 ratio on a consolidated basis fell to 12.5% by June 2021, from 15% in December 2020, and the Total Capital Ratio to 15%, from 16.6%.

Continued recovery of the Greek economy will hinge on increased financing of the real economy with active support from the banking sector. In this respect, risk-sharing through low-interest loans from the Recovery and Resilience Facility - RRF and guarantees by the Guarantee Fund for Greek SMEs of the Hellenic Development Bank will significantly contribute to faster supply of bank credit to the real economy and the implementation of necessary investment in order for the Greek economy to get on track for strong, sustainable growth. However, in the context of prudent risk management, banks must assess the risk/return ratio and the viability of the investment projects they finance. Overall, funding will also greatly depend on the availability of viable investment projects.

Related link:

Executive Summary of the Financial Stability Review - December 2021