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Interview of Professor Christos Gortsos, General Secretary of the Hellenic Bank Association, to the Crisis Observatory

Could you briefly describe the ways in which the Greek banking system was influenced by the crisis?

First of all, we should clarify that over the past 7-8 years we have gone through two separate crises. The first one, i.e. the international financial crisis, which originated in the US, affected the banking systems of many countries through a process of spillover, but did not initially impact the Greek banking system. In the 2007-2009 period, Greece was in an entirely different situation than other countries with regard to its banking system. The financial situation had started to worsen, although the banking system still remained intact. Rather strikingly, Greek banks’ profitability peaked in 2008, i.e. a few months before the collapse of Lehman Brothers and before the onset of the global financial crisis.

Then, in 2010, the financial crisis spread to the eurozone, thus also affecting the Greek banking system through several channels. Here, it is worth pointing out that amidst a financial crisis, a country’s sovereign credit ratings are downgraded, in turn, impacting on the creditworthiness of its banks. In addition, constrained liquidity in the economy results in more non-performing loans (NPLs) and the government’s inability to fulfil the credit guarantees that it has granted.

In the case of Greek banks, the most significant developments were the debt write-down in the context of the Private Sector Involvement (PSI) – broadly known as “debt haircut”- and the debt buy-back operation, which were completed in 2012. The banks that held Greek government bonds in their portfolios incurred significant losses, which turned out to be almost equal to the funds subsequently needed for the recapitalisation of Greece’s ‘core’ (i.e. systemically important) banks.

The fiscal crisis particularly affected the cash flow, balance sheets, and results of banks. Take the example of their balance sheets. First of all, their assets were affected by the losses incurred on Greek government bond holdings and the impairment losses associated with non-performing loans. At the same time, their deposit base contracted and interbank lending froze, resulting in a lack of access to funds and consequently impacting on their liabilities. Deposits fell from €225 billion in 2008 to €150 billion in 2012, but recovered to €165 billion in recent months. The precarious position of banks, along with the reduction in their equity because of their negative net position, led to a need for recapitalisation. Therefore, everything was adversely affected – the results, assets and liabilities of banks.


How did the designated authorities deal with this situation?

In the midst of this situation, the designated authorities, i.e. the Bank of Greece, the Ministry of Finance and the EU/ECB/IMF troika, especially some of its technical branches, had to make some decisions on the future of the banking system. They were faced with a “trilemma”.

(a) The first solution would be the closure of banks deemed to be insolvent, by activating the Deposit Guarantee Fund. This solution was not opted for in any instance – rightly in my opinion – due to the danger of spreading panic among depositors.

(b) The second alternative would be the consolidation (or resolution) of banks deemed as non-viable. In Greece, two resolution tools were adopted: one was the creation of a new bridge bank, to which all the deposits of non-viable banks would be transferred. These banks’ operating licenses would subsequently be revoked and they would be placed under liquidation. The second resolution tool used was the transfer of a troubled bank’s assets, including all of its deposits, to another existing bank. Then, the troubled bank would have its authorisation revoked and be placed under liquidation.

This solution was opted for in many cases, triggering a major change in the banking system. Let me remind you here of the cases of Proton Bank, FBB, ATEBank and Hellenic Postbank, along with other six cooperative banks, which no longer operate; they are now under liquidation and their assets have been transferred to the four ‘core’ (systemic) banks, namely the National Bank of Greece (NBG), Piraeus Bank, Alpha Bank and Eurobank.

(c) The third option was to recapitalise ‒ by means of public funds ‒ those banks which would be deemed as “systemically important” and, consequently, viable (following the example of several banks around the world, ranging from Citibank and UBS to the Royal Bank of Scotland or Lloyds). The banks that were considered to be “systemically important” in Greece were the NBG, Piraeus Bank, Alpha Bank and Eurobank, whose recapitalisation was successfully completed last year with the help of Hellenic Financial Stability Fund (HFSF) funds and (in the case of the first three banks) of private capital, amounting to 10% or more of the necessary funds.

The HFSF is a private legal entity, which has been endowed with €50 billion from the recent loan disbursement to Greece. Its main aim is to recapitalise Greece’s systemically important banks and sell its shares in these banks’ capital within five years. In addition, the HFSF has no supervisory role. The fund is a shareholder and its legal aim is to sell its shares and withdraw, rather than remain a shareholder in these banks.

In consequence, should all things turn out normally, the four systemically important banks will be “de-funded” (or “privatised”, according to the commonly used terms in public debate) over the coming years, while in the meantime they will have been (from November 2014 onwards) put under the direct supervision of the European Central Bank, within the realm of the specific tasks assigned to it under the European law.


What happened in the case of the foreign banks operating in Greece?

Foreign banks operating in Greece through branches (such as Citibank, HSBC, Deutsche Bank, the Royal Bank of Scotland, Unicredit and the Bank of America), have a limited and targeted presence in our country. They used to be far more active, but their business has now contracted.

Another development in the last two years involves the exit from Greece of foreign banks which used to operate via subsidiaries, following the sale of their assets to other banks. Thus, Alpha Bank purchased the assets of Emporiki Bank from Credit Agricole, whereas Piraeus Bank bought Millennium and Geniki Bank from the Portuguese BCB and the French Société Générale, respectively.

One year ago, i.e. in March 2013, in view of preventing a possible spillover of the Cypriot banking system crisis to Greece, all branch offices and assets owned by the three Cypriot banks (Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank) in Greece were sold to Piraeus Bank.

As a result, the presence of foreign banks in Greece has been drastically restricted.


Is this how we were led to an in-depth restructuring of the domestic banking system?

Undoubtedly as a result of the above, the number of banks operating in Greece has declined and the Greek banking system has been radically overhauled. Overall, the four ‘core’ banks currently account for more than 90% of the banking system as a whole. Other banks in operation are Attica Bank, Geniki Bank, the Panellinia Bank, Investment Bank of Greece, Aegean Baltic Bank, Credicom Consumer Finance, ten (10) cooperative banks and the branches of nineteen (19) foreign banks with selectively restricted activity (for example, Citibank, HSBC, Deutsche Bank, Royal Bank of Scotland, Unicredit, Bank of America, Ziraat Bankasi, and Kedr Bank).


Does this consolidation of the banking system influence competition? What does it mean for banking services recipients?

Competition in a banking market is affectced, albeit not exclusively, by the number of banks. Strong competition between banks will persist, as long as banks seek to remain profitable. Therefore, I do not believe that a limited number of banks may also limit competition between them. Indeed, who could argue that the banking systems of Finland or the Netherlands, to name but a few, are not competitive because of their traditionally high (over 80%) level of concentration?

Rather, we should consider that the shrinking number of banks has helped to streamline the banking market. Note the deposit rate cuts over the last year; they are obviously a consequence of the absence of those (less viable) banks that offered very high interest rates in order to attract deposits. Thus, the banking system was streamlined through the decline in the average cost of deposits for banks.

Lastly, we should not forget that this concentration occurred amidst abrupt adjustments and not in the context of a healthy environment and normal market conditions. More specifically, this was a drastic restructuring as a result of the fact that Greek banks were badly affected by the financial crisis, the haircut on public debt and the Greek economy’s general state until recently, as it is now showing signs of recovery. In any case, I believe that the restructuring was quite successful in the end, despite the difficult conditions under which it was performed.


Some people argue that through the recapitalisation process Greece became indebted in order to rescue the banks. Meanwhile, the banks that were rescued have not done everything they could to help revive the Greek economy. What would be your answer to this kind of criticism?

Such an approach is totally misguided for two reasons.

First of all, it is a fact that many businesses from other sectors of the economy were not bailed out by the state. Thus, the following question arises: why do we need to rescue banks and not other businesses as well, which produce other goods and services? The answer to this question rests on a simple fact: if a banking system collapses, the losses to the economy as a whole are truly devastating. Let’s imagine, for instance, that the entire banking system collapses. In such a case, it will not be possible for depositors to maintain their deposits or for businesses to continue borrowing.

The second reasonable mistake that is prevalent in public debate is that “banks lend on equity – loans to businesses are provided by the bankers”.

To start with, the term “banker” is completely outdated, as no bankers exist today, but rather bank shareholders, i.e. several millions of individuals and legal entities. Moreover, banks do not provide loans to the economy based on their own funds (worldwide, banks’ capital and reserves do not exceed 10% of their assets on average), but rather on the loan capital sourced from depositors, the interbank market and bond markets. Banks are the only type of business that borrows in order to lend.

The answer to the popular phrase: “the banks have turned off the tap” would thus be that “the tap is wide open but we have run out of water”. This is not my finding – this is what a senior bank manager said few years ago. Indeed, this is particularly true today: no liquidity, no borrowing.

The recapitalisation of banks has been an interim step to restore the solvency of banks and thereby to gradually return to normal conditions in the market. After the recapitalisation of Greek banks, their solvency was strengthened, meaning that they now have sufficient equity. However, the issue of their liquidity has not yet been resolved, given that banks are businesses that borrow money in order to lend it subsequently. Thus, they do not lend their own money. We wrongly assume that banks lend the money that they received through their recapitalisation. Nevertheless, the recapitalisation of these banks was a necessary prerequisite for their stabilisation, in order for them to be solvent again and gradually return to the markets, issue bonds, borrow money in the interbank market and attract deposits, and hence increase the funding pool from which it draws funds to provide loans.


What are the liquidity conditions in the banking market today?

The current situation is much better than it used to be two years ago: 2012 was the harshest year, due to the massive outflow of deposits. The figures are as follows:

–          Deposits came to €228 billion in 2008,

–          then, to €151 billion in June 2012,

–          gradually recovering to €161-165 billion over the past few months.

This gap, which resulted from the suspension of interbank market-making, was covered by the banks by means of borrowed funds, initially from the European Central Bank (ECB) and subsequently from the Bank of Greece, under the Emergency Liquidity Assistance (ELA) mechanism. In late February of this year, borrowing amounted to €68 billion (or 44% of total deposits), whereas this amount reached €114 billion (or 90% of total deposits during that period) at the peak of the crisis (June 2012).

In this respect, I would like to point out that, although conditions have improved, the Greek banking system still faces a liquidity problem, given its substantial dependence on the Eurosystem and the fact that their deposits have still not returned to their 2008 levels. A positive development was the recent return of Greek banks to international capital markets for the first time since 2009, in order to raise loan capital through the issuance of bonds.


What about the liquidity of the economy? You argued that banks do not finance businesses which ask for funds. Are we to expect a growth of credit in the real economy that will boost its recovery?

To the extent that banks are liquid, they can especially assist SMEs and large, sustainable enterprises. Debt financing to SMEs, with the support of various other guarantee mechanisms that have been developed at both national and European level, increased tenfold over the last twelve months and is currently on the rise. Nevertheless, we should not overlook the fact that even unsustainable businesses have also resorted to the banking system for credit; in view of the evolution of the structure of our economy, these businesses may lose their access to financing.

On the other hand, I personally believe that the challenge for many businesses does not lie in borrowing funds, but rather in raising equity. Many businesses need more working capital and banks are obviously not buying shares of these businesses, but offer them loans. Taking into account that the value of business shares has fallen considerably, corporate leverage has risen excessively. In other words, the debt-to-equity ratio has deteriorated. Many businesses need equity though, not loans.

Moreover, we know that recovery in many economies faced with problems similar to ours, at least in the first stages, was achieved without bank credit. This is what we call “creditless recovery”. It is a phenomenon which has been examined in recent years, precisely because banks have been cautious to extend new loans to businesses, whose equity value has shrunk excessively.


What is the situation concerning non-performing loans (NPLs) during the crisis?

According to the latest data from the Bank of Greece, NPLs account for roughly 31% of total loans. Let me remind you that this rate was 4.5% in 2007, very close to the 3% target.

However, 4.5% climbed to 31%. It is worrying that NPLs across loan categories are increasing at a rate that is unusual for an OECD country. SMEs have naturally borne the brunt (in fact, many have now closed), and we do not know as yet what the extent of recovery will be, given that the value of collaterals has fallen significantly.

Similarly, consumer loans and credit cards have also been severely hit, despite belonging to the category of unsecured loans, i.e. the bank needs to turn to the borrower’s total assets for coverage. The ratio of NPLS for mortgage loans is slightly better, but still considerably higher, while as regards loans to large businesses, they are in a slightly better condition. Generally speaking, the situation is alarming.


How do you perceive the situation of the Greek banking system, as illustrated in the report of BlackRock?

On 6 May 2014, the Bank of Greece published the results of the “2013 Stress Test of the Greek Banking Sector”. This report estimates the capital needs for all Greek commercial banks at €6.4 billion. Furthermore, the Bank of Greece asked the banks to submit – no later than 15 April 2014 – their plans on capital injection, based on the results of the report’s ‘baseline scenario’ and due to be implemented as soon as reasonably possible.

In this context, two out of the four systemic banks have already announced increases in their share capital, many times higher than their actual capital needs; the third systemic bank announced that it will cover its capital needs initially without an increase in its share capital; and the fourth bank’s Board of Directors is expected to meet to discuss an increase in its share capital.

Notably, in late 2013 the cumulative estimates of banks for bad loans amounted to €33.7 billion, compared with €6.4 billion in December 2008, i.e. they recorded a 428% increase within five years. In this sense, the needs for further recapitalisation were – as expected – insignificant.


With regard to the Banking union, what stage are we at?

By the term European Banking union, we mainly refer to three interrelated elements. The idea of Banking union is based on a single supervisory authority, which will be the ECB, working together with the national supervisory authorities. Concurrently, there will be a single European body to monitor the resolution of financial institutions. Moreover, a single deposit guarantee scheme may be established in the distant future, funded centrally and activated once a bank fails. All these will be subject to a single set of regulatory rules that go by the name “single rulebook”, which have already been partially adopted and are bound to enter fully in force within 2014 (most probably during the Greek Presidency).

(a)    Progress has already been made on the first part. The relevant legislative act has been issued, according to which the single supervisory mechanism must operate as of 4 November 2014; the mechanism will comprise both the ECB and the central banks or independent supervisory authorities. In addition, the new rules have been put into force since 1 January 2014 regarding the licensing, supervision and prudential regulatory intervention in the operation of banks, i.e. rules governing – inter alia – the capital adequacy, large exposures, liquidity, leverage and corporate governance of banks.

(b)   As far as the second part is concerned, namely the resolution of banks, the basic framework will be made up of one Regulation and one Directive, which are expected to be finalised during the Greek Presidency. The Regulation, known by its acronym (SRM), i.e. Single Resolution Mechanism, provides that in case a bank needs resolution-liquidation, then this will be done at pan-European, rather than national, level. Moreover, a single fund will be gradually set up, to be funded with contributions from banks, rather than the state; this fund will cover possible funding gaps, especially during the transfer of funds from one bank to another, a process known as asset transfer.

(c)    As far as the deposit guarantee scheme is concerned, the creation of a single guarantee fund has not yet even been discussed, whereas there are no proposals towards this direction. On the contrary, a new Directive replacing the existing one that dates back to 1994 is pending adoption, so as to ensure greater harmonisation of the conditions of operation of deposit guarantee schemes at European level. Political agreement on this Directive was achieved in December 2013 and it can be reasonably expected that it will be fully adopted during the Greek Presidency.


Would you say that you are satisfied with developments in the banking union so far?

Having watched European issues closely for three decades now, I would say that the speed at which decisions were taken and the incubation period for the adoption of legal acts on the banking union has been amazingly fast. Both you and I have seen Directives that took decades before they were adopted, transposed into national law and effectively implemented. In our case, it was clear that the political will to initiate the branch of prudential supervision did exist. The great compromise – given Member State disagreements – is the fact that despite the European Commission’s proposal to gradually place all banks under the supervision of the ECB, only the systemically important banks were handled in this way. We are talking about 128 banks out of the total 5.500 banks in the eurozone, which account for approximately 83% of the banking system in terms of assets, liabilities and capital.

The success of the project will definitely depend on the ECB’s ability to respond to its new tasks, as well as on how well the latter will collaborate with national supervisory authorities. On this issue, the debate is extensive and there are conflicting arguments. For instance, academics have argued that the monetary authority should not be a supervisory authority at the same time, to avoid the emergence of a conflict of interests.

Perhaps it is not widely known – although rather striking – that this is the first time since WWII that both Germany and France will delegate the supervision of their banks to a monetary authority. In both countries, the supervision of the banking system has been under the jurisdiction of independent authorities, other than the monetary authority. Much will certainly depend on how the ECB will operate, but it has thus far proven that it has the political will and flexibility to discharge the tasks it has been assigned with.

Concerning resolution, I believe that we are still wavering and uncertain about the exact manner in which it will function, although there have been positive signs over the last few days. More specifically, the resolution tools had not been developed in full before the onset of the crisis. Prudential monitoring and regulatory intervention at the international level have been in place since the 19th century, while resolution mechanisms did not exist before 2009, when the recent global financial crisis broke out. Thus, we are currently in uncharted territory and this requires a point of maturation.

Lastly, once the integration of the various deposit guarantee schemes is complete or a single deposit guarantee scheme is established, I believe that we will have reached political and fiscal integration in the European Union. Thus, when a release announcement is made or (even more so) when a Commission proposal on a single deposit guarantee scheme is released, I think that the process of Europe’s political unification will have been initiated.


In the context of the resolution mechanism, the new approach on deposits used in the case of Cyprus has been adopted. How would you evaluate this approach?

Firstly, we need to clarify that the term “bail-in” does not refer to the “haircut” of deposits or other borrowed funds: deposits and other borrowings are not subject to haircuts, but rather converted into bank equity so as to absorb losses in the event of insolvency. It should also be noted that the bail-in for deposits only involves amounts exceeding €100,000 per depositor/ joint account holder and per account. Thus, the percentage of depositors who are bound to be affected by this bail-in is only limited. In Greece, for instance, such a possibility would involve a very small minority of private depositors (something like 0.5% or less).

Additionally, it should be clarified that depositors have lower priority than all other creditors of banks (namely all categories of bondholders) and, therefore, the bail-in of deposits will be a solution of last resort, since the possibility of adopting other methods of resolution will not have been exhausted (e.g. splitting of a bank, accompanied by a transfer of its deposits and viable assets to an existing or new bank – which was the case in Greece in the period 2011-2013, as I already mentioned).

Nevertheless, in the eventuality of such a scenario, it is more probable that corporate, rather than private, deposits will be affected – just like in Cyprus in 2013. For instance, think of the impact on business payroll accounts. This should be treated with due diligence.


In general, are you satisfied with the progress of reforms in the financial sector at the international and European levels, given that the main causes of the crisis in 2007 have been false practices and misperceptions?

To start with, we must distinguish between two core concepts – supervision and regulation. It is often the case that discussions focus on regulation, but supervision is equally important and this can be easily understood when one analyses the causes of the crisis.

Progress in both these fields has already been significant. However, major challenges still remain, although these are to be discussed and negotiated by the Basel Committee on Banking Supervision (BCBS) and by the Financial Stability Board (FSB). Both the legislation applicable in the United States that is based on the “Volcker Rule” and the new regulatory framework of the Basel Committee, known as “Basel III”, which for the first time defines new indicators on liquidity and leverage, are significant changes compared with the applicable regime before the crisis and are expected to significantly reduce speculative practices. In Europe, there is also a proposal for a Regulation on a new approach, according to which the different sectors of a bank will be required to be based in different subsidiaries, with separate capitalization, so as for deposits to remain unaffected and in order to avert particular practices and activities under certain conditions. Much has been done in a short period of time – think about the proposal for a single supervisory mechanism, which was first submitted in June 2012, while the proposal for the relevant Regulation ensued in October 2013.


I would like to conclude with a question concerning Greece. How optimistic are you with regard to the course of the Greek economy and, by extension, of the Greek banking system?

Look, when talking about recovery, it would be wise to define the word – recovery means GDP growth. If we examine the GDP’s components, we will see that net exports are positive at the moment, but not sufficient, given that they are largely a by-product of the downturn and shrinking imports, whereas public investment is declining, just like private savings. Therefore, the bet we need to win is achieving a sharp increase in private investment.

In this context, the Hellenic Bank Association (HBA) is seeking to contribute in an analytical, reasoned and sober way to the public debate on a new economic model for Greece, by formulating concrete policy proposals to bolster competitiveness and the growth outlook of the Greek economy. These proposals were presented on 19 May 2014 as part of a collective volume, entitled “Competitiveness for Growth: Policy Proposals”, co-edited by the President of the Scientific Council, Mr. Michalis Masourakis, and myself.