IMF published its staff report under the First Post-Program Monitoring Discussions with Greece. Directors encouraged the authorities to take a more comprehensive, well-coordinated approach to strengthening bank balance sheets and reviving growth-enhancing lending. Noting the high level of non-performing exposures (NPEs), the IMF Directors encouraged authorities to bring together key stakeholders and base policy measures on cost-efficiency assessments of various NPE reduction options, while considering the impact of forthcoming regulatory changes.
The report highlights that bank liquidity improved further in 2018, but balance sheets remain significantly impaired and deleveraging continues. An ongoing recovery in private deposits and an increase in State government deposits in commercial banks have facilitated near elimination of Emergency Liquidity Assistance and further liberalization of capital flow management measures. However, the banking system as a whole remains short of prudential liquidity requirements and NPEs remain the highest in Europe, at 47% of outstanding loans (EUR 85 billion) at the end of September. Sale of NPEs have increased recently, with write-offs being among the key drivers of NPE reduction and the new NPE creation exceeding "curing."
The Greek banking system remains highly vulnerable. NPEs remain high and the quality of the performing loan book is uncertain due to borrowers’ stretched balance sheets, the high share of variable interest rate loans, and a weak payment culture. Under the Single Supervisory Mechanism, or SSM, pressure, banks are aiming for faster NPE reduction, but their efforts are limited by low capital (fully loaded), weak profitability, and tight liquidity. Meanwhile, any delays in system clean-up would slow the return of lending and would leave the banking system (and financial stability) vulnerable to a materialization of risks. This could in turn fuel a negative feedback loop of declining confidence, reemerging liquidity shortages, and capital depletion. The State also relies on bank participation in its debt issuance and interest rate hedging. Banks’ total exposure to the sovereign is close to 180% of their combined common equity tier 1 (CET1). Given the current exposures, staff estimates that a 100 basis points increase in sovereign securities’ yields would result in a 0.5 percentage point drop in CET1 ratios, on average.
Various stakeholders are calling for a more active policy stance to repair bank balance sheets, but there are mixed views about the best way forward. Staff from the European Institutions and the IMF continue to press for improvements and for better take-up of private sector-led NPE-reduction strategies, but progress has been slow. The government, the Hellenic Financial Stability Fund, and the Bank of Greece have proposed a variety of State-supported NPE reduction solutions, which will need to be assessed for compatibility with EU state-aid rules. Banks would prefer a menu of options, with some banks moving ahead independently of these proposed schemes. In this context, staff stressed the urgency of comprehensive, well-coordinated actions to repair private-sector balance sheets, improve the payment culture, and (ultimately) revive bank lending. This will require efforts in several interlinked areas:
- Building up capital to support ambitious NPE-reduction targets
- Strengthening existing NPE-reduction toolkits, aimed to facilitate private solutions
- Carefully assessing options for State support of system-wide NPE reduction
- Improving banks’ viability and governance
- Liberalizing capital flow management measures
Related Link: Staff Report
Keywords: Europe, Greece, Banking, Securities, SSM, Post-Program Monitoring, CET-1, Liquidity Risk, NPLs, Bank of Greece, IMF
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