Featured Product

    IMF Publishes Reports on 2019 Article IV Consultation with Greece

    November 15, 2019

    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. 

     

    Related Links

    Keywords: Europe, EU, Greece, Banking, Article IV, NPE, SSM, Securitization, Loss-Absorbing Capacity, Governance, Credit Risk, IMF

    Featured Experts
    Related Articles
    News

    APRA Sets LAC for D-SIBs, Proposes to Enhance Crisis Preparedness

    APRA issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900).

    December 02, 2021 WebPage Regulatory News
    News

    EC to Review Macro-Prudential Rules while ESRB Assesses Policy Stance

    The European Commission (EC) launched a call for evidence, until March 18, 2022, as part of a comprehensive review of the macro-prudential rules for the banking sector under the Capital Requirements Regulation (CRR) and Directive (CRD IV).

    December 01, 2021 WebPage Regulatory News
    News

    FSB Sets Out Good Practices for Crisis Management Groups

    The Financial Stability Board (FSB) published a report that sets out good practices for crisis management groups.

    November 30, 2021 WebPage Regulatory News
    News

    APRA Penalizes Heritage Bank for Incorrect Reporting of Capital

    The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Releases Annual Report 2021-2022

    The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Updates Timeline for Implementation of Certain Basel Rules

    Through a letter addressed to the banking sector entities, the Office of the Superintendent of Financial Institutions (OSFI) announced deferral of the domestic implementation of the final Basel III reforms from the first to the second quarter of 2023.

    November 29, 2021 WebPage Regulatory News
    News

    EC Defers Adoption of Regulatory Standards for Disclosures Under SFDR

    EIOPA recently published a letter in which EC is informing the European Parliament and Council that it could not adopt the set of draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR) within the stipulated three-month period, given their length and technical detail.

    November 29, 2021 WebPage Regulatory News
    News

    FCA Releases MIFIDPRU Application Forms and Third Set of Rules on IFPR

    The Financial Conduct Authority (FCA) published the third in a series of policy statements that set out rules to introduce the UK Investment Firm Prudential Regime (IFPR), which will take effect on January 01, 2022.

    November 29, 2021 WebPage Regulatory News
    News

    APRA Finalizes Capital Adequacy Standards for Banks

    The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.

    November 29, 2021 WebPage Regulatory News
    News

    CPMI-IOSCO Seek Comments on Access to Central Clearing and Portability

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.

    November 29, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7751