IMF published its staff report and selected issues report, as part of the assessment under the 2019 Article IV consultation with Greece. The IMF Directors emphasized the importance of restoring the resilience of financial sector and its ability to support growth. They welcomed the more ambitious nonperforming exposure (NPE) reduction objectives of the government, noting that the proposed state-supported NPE securitization guarantee scheme could provide important backing. However, the Directors stressed the importance of taking a more comprehensive, ambitious, and well-coordinated strategy to clean up bank balance sheets by relying on market-based mechanisms.
The staff report highlights that, despite multiple assessments and substantial injections of state and private funds over the past decade, the banking system remains a misfiring engine of growth and a source of fiscal and financial stability risks. Efforts to clean up the banking system have been hindered by a combination of poor banking practices, weak financial sector policies, forbearance, sovereign debt restructuring, deeper-than-expected recession, changing regulatory goal posts, and weak coordination among key stakeholders. Furthermore, the quality of capital remains weak and system-wide NPEs remain the highest in Europe, while profitability is the lowest (which limits internal capital generation and ability to attract private investors). Access to unsecured funding remains limited and expensive. Despite the recent improvements, some systemic banks are in breach of liquidity coverage ratios.
The new government says it is prioritizing bank clean-up. Banks recently announced more aggressive NPE reduction targets (in agreement with the Single Supervisory Mechanism, or SSM) that would bring the NPE stock down to EUR 29 billion by the end of 2021, from EUR 82 billion at the end of 2018. The Prime Minister has called for even more aggressive reductions, aiming to bring NPE ratios to single digits by mid-2022. At the current pace, the recovery of banks’ lending support for investment and growth will take many years. Even the more aggressive and challenging NPE reduction targets called for by the Prime Minister could leave Greek banks as outliers vis-à-vis EU peers. Meanwhile, constraints in the resolution framework imply that any major bank failure would be highly destabilizing. Policy options for supporting banks under stress are constrained by limited capital and bail-in-able buffers and by state-aid and other Euro-Area-wide rules. The policy discussions focused on building consensus to further accelerate financial sector reforms and restore bank viability:
- Faster reduction of NPEs. The IMF staff recommended even faster NPE reduction than proposed by banks and government, aiming to bring Greece close to the Euro Area norms by the end of 2021. This should include a focus on hive-off strategies, whether relying on internal capital or drawing on one (or both) of the proposed state-supported schemes.
- Build and clean up capital. Additional capital will likely be needed to fund even the more modest NPE reduction targets agreed with the SSM, while complying with the SSM provisioning calendar and financing the necessary internal investments to achieve business goals. The sftaff urged efforts to strengthen the loss-absorbing capacity of bank capital.
- Strengthen bank internal governance and profitability. Staff advised that stronger internal governance would help improve new loan pricing and other business decisions and asset liability management.
- A comprehensive, coordinated strategy. The recommended measures would be more effective if packaged in a more holistic strategy via appropriate sequencing of measures and by bringing the key stakeholders together. The staff recommended that any strategy should include a forward-looking analysis of bank business sustainability, possible fiscal costs, and an assessment of the long-term impact on the bank profitability and the risks associated with an increasing share of difficult-to-value securitization exposures on bank balance sheets.
The authorities agreed that measures to restore banking system health should be accelerated. While emphasizing the recent positive trends, the authorities noted that a holistic strategy is required to address the high legacy NPEs. The authorities expect banks to enhance their business strategies and agreed that improvements are necessary in the governance, internal audits, and risk management of banks.
Keywords: Europe, EU, Greece, Banking, Article IV, NPE, SSM, Securitization, Loss-Absorbing Capacity, Governance, Credit Risk, IMF
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.
The European Commission (EC) published the Delegated Regulation 2021/1527 with regard to the regulatory technical standards for the contractual recognition of write down and conversion powers.
In a response to the questions posed by a member of the European Parliament, the President Christine Lagarde highlighted the commitment of the European Central Bank (ECB) to an ambitious climate-related action plan along with a roadmap, which was published in July 2021.
The Single Resolution Board (SRB) published a Communication on the application of regulatory technical standard provisions on prior permission for reducing eligible liabilities instruments as of January 01, 2022.
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to provide guidance to authorized deposit-taking institutions on the interpretation of APS 120, the prudential standard on securitization.
The French Prudential Control and Resolution Authority (ACPR) published the corrective version of the RUBA taxonomy Version 1.0.1, which will come into force from the decree of January 31, 2022.
The European Commission (EC) announced that Nordea Bank has signed a guarantee agreement with the European Investment Bank (EIB) Group to support the sustainable transformation of businesses in the Nordics.
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries.