Athens central banker sees no danger for Greek banks.

The turmoil in the banking sector is also hitting Greek institutions. Greek banks seem well armed - but have a serious weakness.

As recently as mid-2015, the Greek financial system was on the verge of collapse. The turmoil in the European banking sector is now raising new concerns that Greek institutions will once again face major problems. Bank of Greece Governor Yannis Stournaras, however, does not see such a danger.

'Greek banks are more resilient than they were a few years ago and are better cushioned to absorb the impact of a financial crisis', Mr. Stournaras told Handelsblatt. Banks have made 'significant progress in cleaning up their balance sheets and have ample liquidity thanks to the increase in deposits as well as access to wholesale markets,' Mr. Stournaras stresses.

The Greek central bank chief adds: 'They have also returned to profitability in 2022 and improved their capital adequacy to a level above regulatory requirements'. The exposure is 'close to zero', according to Mr. Stournaras. The institutions also have no exposure to Credit Suisse's equity-like Additional Tier 1 (AT1) bonds.

Indeed, the four systemic Greek financial institutions have largely recovered from the turmoil of the 2010-2018 crisis years. They have reduced the ratio of non-performing loans, which reached almost 50% of total outstanding loans in March 2016, to 8.7 percent by the end of December 2022, and deposits have grown by 30% over the past four years.

Today, oustanding loans of 123 billion euros are matched by deposits of 201.2 billion euros. The inflows from the EU Recovery and Resilience Fund (RRF) will further strengthen banks' liquidity and boost lending in the coming years.

So far, there are no signs of a bank run like the one Greece experienced in early summer 2015 at the height of the euro crisis. Back then, leftist Prime Minister Alexis Tsipras and his Finance Minister Yanis Varoufakis led the Greek financial system to the brink of collapse with their confrontational course toward international creditors.

Fearing a Grexit, Greece's exit from the euro area, people emptied their bank accounts at the time. Within six months, deposits fell from 160 to 136 billion euros. To avert a bleeding out of banks, the government closed institutions for three weeks at the end of June 2015 and introduced capital controls.

By comparison, serenity now reigns in the boardrooms of Greece's financial institutions. The collapse of Silicon Valley Bank (SVB) is a special case, they say. 'The probability of something like this happening in Europe is extraordinarily low', Fokion Karavias, CEO of Eurobank, told the Greek newspaper Kathimerini. In contrast to the highly specialised SVB, Greek banks, with their diversified business models, are in a much more stable position, says the Eurobank CEO.

Finance Minister Christos Staikouras also sees the banks in good shape, but urges vigilance in the face of 'global uncertainty and new challenges': 'The government is monitoring developments in close cooperation with the supervisory authorities and will do everything to ensure the stability of the Greek financial system'.

Greece: structural weaknesses in the banking sector

As a result of the Greek sovereign debt crisis, however, the banking sector is still struggling with a structural problem. Write-offs of bad loans have eaten up a lot of equity in recent years.

With a core capital ratio (Tier 1) of 13.2%, Greek banks do meet the minimum requirements. But 63% of prudential own funds is accounted for by deferred tax credits from loss carryforwards. In this way, the state compensated the banks in 2012 for the losses from the haircut.

In order to enhance their capital adequacy, banks are now refraining from paying dividends in 2022, despite billions in profits. In its latest Financial Stability Review, the Bank of Greece describes the high proportion of tax credits in prudential own funds as a 'challenge'.

Central bank governor Stournaras, however, sees the banks on a good path in strengthening their capitalisation: 'Going forward, the convergence of asset quality with the EU average, the improvement of quality and supply of capital, and the sustainability of earnings due to business growth will further strengthen the fundamentals of Greek credit institutions', the central bank governor predicts.

(C) 2023 Electronic News Publishing, source ENP Newswire