27 December 2012

Bank of Greece: Report on the recapitalisation and restructuring of the Greek banking sector

Over the last couple of years, the Greek banking sector has been severely hit by the combined effects of:

• the cut-off from international markets and  deposit outflows;
• adverse economic conditions, which resulted in deteriorating asset quality;
• the restructuring of the Greek sovereign  debt through the Private Sector Involvement (PSI).

These factors put pressure on the liquidity and  the capital base of Greek banks, thus threatening the stability of the banking sector and  long-term sustainability of several banks. In light of these conditions, the Bank of Greece and the Greek Government implemented a series of measures to safeguard financial stability and protect depositors’ interests. Such actions comprised inter alia:

• meeting banks’ short-term liquidity needs  by allowing access of eligible banks to  emergency liquidity assistance (ELA);
• securing sufficient public resources (Financial Envelope) to cover the recapitalisation needs and restructuring costs of the  Greek banking sector for the period 2012- 2014, which were estimated at €50 billion;
• resolving distressed banks, within an enhanced legal framework;
• requesting all banks to increase their capital to a conservative level.

Within this process, the European Commission, the European Central Bank and the International Monetary Fund provided guidance and ensured consistency with the programme’s objectives. An international consulting firm provided analytical and technical support to the Bank of Greece in a range of  activities.

This report presents the methodology used in  the estimation of the Financial Envelope and confirms that the €50 billion earmarked under the Economic Adjustment Programme is appropriate as of December 2012 – taking into  account two main elements:

• the estimate of the  capital needs  of all banks on a consolidated basis – based on the detailed assessment performed during the early part of 2012;
• an updated estimate of the components of the Financial Envelope – taking also  into account events that materialised later  in 2012, potential costs of future restructuring, and an appropriate buffer.

The Bank of Greece also conducted in March 2012 a strategic assessment of the banking sector. This analysis assessed the viability of banks on the basis of a much broader set of criteria (comprising regulatory and business criteria) and utilising both financial and prudential information. The strategic assessment identified four “core banks”, namely National  Bank of Greece, Eurobank, Alpha Bank and Piraeus Bank, which were deemed suitable  candidates for recapitalisation using programme funds. 

“Non-core banks”, as noted in the December 2012 Memorandum, will need to be recapitalised by the private sector by end-April 2013. Otherwise, they will be resolved by the end of  June 2013.

Based on the information available on December 2012, the Bank of Greece considers that the €50 billion earmarked amount in the Economic Adjustment Programme is appropriate to cover the recapitalisation and restructuring costs of the Greek banking sector. As such, it is expected to remain adequate under reasonable levels of economic uncertainty

The improvement in the capital and liquidity position of Greek banks will enable them to continue supporting the real economy and, thus, contribute to the improvement of the business environment. These elements will be instrumental in restoring sustainable growth to the Greek economy.

Full report

© Bank of Greece