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
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