Greece
Financial System Stability Assessment, including Reports on the Observance of Standards and Codes on the following topics, Banking Supervision, Insurance Supervision, Securities Regulation, and Anti-Money Laundering and Combating the Financing of Terrorism
Author: International Monetary Fund
Publication Date:
06 Jan 2006
eISBN:
9781451816259
Language:
English
Keywords:
ISCR; CR; bank; risk; liquidity position; bank supervision framework; commercial bank; secondary market
Download PDF (1.6 MB)

This paper discusses key findings of the Financial System Stability Assessment on Banking Supervision, Insurance Supervison, Securities Regulation, and Anti-Money Laundering and Combating the Financing of Terrorism for Greece. The Greek financial sector appears largely sound and resilient to potential adverse shocks. The banking system is well capitalized and profitable, with adequate liquidity, but faces challenges arising from the recent rapid credit growth that increases bank exposure to unfamiliar credit risks. Strategic and medium-term challenges include addressing legal and institutional impediments to improving competitiveness and developing new, cost-efficient sources of funding.

Abstract

This paper discusses key findings of the Financial System Stability Assessment on Banking Supervision, Insurance Supervison, Securities Regulation, and Anti-Money Laundering and Combating the Financing of Terrorism for Greece. The Greek financial sector appears largely sound and resilient to potential adverse shocks. The banking system is well capitalized and profitable, with adequate liquidity, but faces challenges arising from the recent rapid credit growth that increases bank exposure to unfamiliar credit risks. Strategic and medium-term challenges include addressing legal and institutional impediments to improving competitiveness and developing new, cost-efficient sources of funding.

I. Sources of Potential Risk

A. Macroeconomic Risks

1. Greece has enjoyed a sustained economic boom since 2000. Output growth averaged some 4½ percent each year, spurred by monetary easing by the European Central Bank (ECB), a significant fiscal expansion, and the Olympic Games. Private consumption and investment has been buoyant, supported by strong real wage growth, wealth effects from rising real estate prices, gains in employment, and financial sector deregulation. An increase in private sector savings has compensated for the growing dissaving by the government sector, resulting in national savings remaining at 28 percent of gross domestic product (GDP) in 2004.

2. The period since 2000 was marked by relatively high inflation rates compared with the euro area and an erosion of competitiveness. Inflation exceeded the euro area average by 1–2 percentage points since 2000. Competitiveness has suffered as real wage increases have run ahead of productivity, especially in the last two years, and unit labor costs have risen 7 percentage points faster than the euro area average.

3. Growth is expected to slow somewhat, although remain strong relative to most EU countries. The end of Olympics-related stimulus and needed fiscal consolidation will act as brakes on domestic demand, while cumulative losses in competitiveness could limit the benefits of stronger European growth. The stimulative effects of euro adoption will wear off, while interest rates are expected to rise from current low levels. Moreover, high oil prices and the euro appreciation pose downside risks to growth.

B. Financial Exposures

4. Household indebtedness has increased steadily. The combination of financial sector deregulation and the rapid fall in interest rates led to an expansion in household demand for credit. Average annual credit growth to households exceeded 30 percent between 2000 and 2004 and included both short-term consumer credit and mortgage debt (Table 1). Risks in this growth, however, are mitigated by the relatively low level of household indebtedness—33 percent of GDP in 2004 compared with 50 percent of GDP in the euro area.

Table 1.

Household and Nonfinancial Corporate Debt

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Source: Bank of Greece.

5. Enterprise indebtedness increased at a slower pace than household debt and remains relatively low by EU standards. Total enterprise debt increased by an average of 11 percent per year between 2000 and 2004, rising to 53 percent of GDP. This exposure is low compared with 62 percent for the euro area, reflecting, in part, the relatively recent deregulation of the Greek credit market.1 Debt-to-equity ratios have increased sharply in recent years, reflecting declines in market values for enterprise equity on the Athens Stock Exchange (ASE) as well as increases in debt (Figure 1).

Figure 1.
Figure 1.

Enterprise Debt-to-Equity Ratio

(In percent)

Citation: IMF Staff Country Reports 2006, 006; 10.5089/9781451816259.002.A001

Source: Bank of Greece.

II. Strengths and Challenges of the Financial System

6. The Greek financial system is small by European standards and is dominated by banks. Total assets of the financial system are estimated at 170 percent of 2004 GDP, compared with 250 percent in France (2003), 320 percent in Spain (2004), and 380 percent in Germany (2002). Commercial banks are the main component of the Greek financial sector, with 76 percent of total financial assets (Figure 2). Insurance companies, pension funds and other institutional investors (such as mutual funds) are small in size—3 percent, 7 percent, and 11 percent of the financial system, respectively.

Figure 2.
Figure 2.
Figure 2.

Greece: Characteristics of the Financial Sector

Citation: IMF Staff Country Reports 2006, 006; 10.5089/9781451816259.002.A001

Sources: Bank of Greece; Association of Greek Insurance Companies; Hellenic Capital Market Commission; and the IMF Global Financial Stability Report.1/ Value of shares traded to market capitalization.

A. Commercial Banks

Structure and performance

7. The banking sector is relatively concentrated by European standards. The top five banks accounted for 65 percent of assets, 67 percent of loans, and 65 percent of deposits in 2004 (Table 2). This concentration has increased following deregulation, a trend seen throughout Europe. The Herfindahl index shows moderate concentration overall, compared to low concentration across the euro area as a whole (1,069 and 600 in Greece and the euro area respectively).

Table 2.

Market Share of Five Largest Banks

(In percent of total assets)

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Source: European Central Bank.

National Bank of Greece (NBG), Alpha, EFG Eurobank, Emporiki, and Piraeus.

8. The Greek banking sector appears to have adequate levels of capital, profitable, and liquidity. A decline in banking system capital adequacy ratio (CAR) from 2000 to 2002, reflecting a shift in asset composition from zero risk-weighted government bonds to commercial credit, was reversed in the last two years in response to supervisory requirements to increase capital (see Appendix Table 16). The aggregate CAR was 12.8 percent of risk-weighted assets at end-2004, in line with euro area levels (Table 3).2 Bank profitability has been sustained by rapid growth in lending, with return on assets (ROA) and return on equity (ROE) estimated at 0.5 percent and 7.5 percent, respectively, in 2004, compared with 0.3 percent and 7.9 percent in the euro area.3 Bank liquidity declined from very high levels in the late 1990s to 17 percent of total assets in 2004, somewhat below EU averages.

Table 3.

Key Indicators for Selected Banks, 2004 1/

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Sources: Bank of Greece; European Central Bank; and published financial statements.

On a solo basis.

NBG, Alpha, EFG Eurobank, Emporiki, and Piraeus.

Excluding Agricultural Bank of Greece (ABG).

Data are for 2003.

These averages include losses recorded by two banks (reflecting charges against an unfunded pension deficit and additional provisioning following acquisition.

Percent of NPLs covered by provisions.

Costs comprise interest expense, administrative expenses, and provisioning for loan losses.

9. While the Greek banking system is financially sound, it faces a number of challenges. The most important include (i) managing credit risks; (ii) managing competitive pressures; (iii) diversifying funding sources; (iv) limiting state influence on the banking system; and (v) strengthening risk management. While these challenges do not appear to present an immediate threat (as described in the stress testing section below), they merit close monitoring.

Credit risk

10. Since 2000, bank credit has expanded rapidly, albeit from a low base. Total credit grew at an average annual pace of 19 percent during 2000–04, with lending to households averaging 34 percent (Table 4).

Table 4.

Greece: Commercial Bank Credit to Nonfinancial Firms and Households, 2004

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Source: Bank of Greece.

11. Bank clients are changing and credit risk may be underestimated. Financial sector liberalization opened the consumer credit market to both households and SMEs. These newer clients do not have significant credit histories or experience managing economic slowdowns. Moreover, current bank management has little experience managing either sharp interest rate hikes or an economic downturn. As a result, loan pricing and risk management techniques may not accurately capture the risks presented by these clients. Credit risk management may be marginally limited by the fact that borrowers are able to remove their name from the credit bureau’s records, although a mention of the removal remains.

12. The large commercial banks have expanded into new jurisdictions, diversifying income sources but generating additional risks. Expansion into the relatively underbanked regions of Southeast Europe is a new source of profits, and the immediate risks are probably small and manageable (Table 5).4 However, risks may increase over the medium term as lending expands beyond traditional Greek corporate enterprises to local firms and individuals, for whom estimating credit worthiness is more uncertain. In addition, management and risk monitoring capabilities of the banks are being stretched, as some open 10–15 new branches a year in the region, and complex cross-border decision-making structures are adopted. Finally, BoG inspectors find that risk management capabilities in the subsidiaries may be insufficient.

Table 5.

Assets and Own Funds of Subsidiaries and Branches of the Large Greek Banking Groups in Southeastern Europe, 2004 1/

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Source: Bank of Greece.

NBG, Alpha, EFG Eurobank, Emporiki, and Piraeus.

13. The credit boom does not appear to be related to a housing price bubble. While the housing market has been dynamic, price increases have stabilized since 2002 (Figure 3). The share of mortgage lending to total assets in the banking system averages 25 percent (see Table 4). The preponderance of floating rate mortgages could expose banks to increased credit risk, but bank supervisors are monitoring households’ debt servicing capacity, and banks report that they continue to lend on the basis of conservative loan-to-value and debt-service-to-income ratios. The banks’ ownership of real estate is small.

Figure 3.
Figure 3.

Real Estate Price Index

Citation: IMF Staff Country Reports 2006, 006; 10.5089/9781451816259.002.A001

Source: Bank of Greece.1/ June 2004.

14. Lending to related parties represents an important portion of bank capital, while foreign currency denominated lending is less significant (Table 6). The exposure to related parties largely reflects lending by the parent to financial subsidiaries in Southeastern Europe where risks are probably small and manageable. Lending to Board Directors represented only 4.7 percent of own funds in September 2004. Foreign currency lending to domestic residents has declined substantially, and the remaining exposure is largely to the shipping industry, where revenues as well as debt are denominated in dollars. This industry is a traditional client of the Greek banking sector, and the banks specializing in this lending have developed expertise over many shipping cycles.

Table 6.

Exposures to Selected Asset Classes

(In percent of own funds)

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Source: Bank of Greece.

Exposures greater than 10 percent of own funds, on a solo basis.

Domestic bank claims on domestic residents.

15. Monitoring these risks is particularly important as bank portfolios are already showing signs of strain. After falling steadily for four years in response to rapid credit growth, favorable economic conditions, and improved risk management, the NPL ratio stabilized at 7.0 percent in 2004, significantly higher than the 4.0 percent average in the euro area (Table 7). This high level of NPLs is a concern, given the rapid economic growth during the period. NPL coverage with provisions is about 51 percent, rising to 60 percent for the large private banks.

Table 7.

Nonperforming Loans of the Greek Commercial Banks

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Source: Bank of Greece.

Nonperforming and doubtful loans, gross of provisions, as a percent of total loans and advances.

Coverage is of the full outstanding value of all loans with payments past due by three months or more, without taking into account collateral.

Competitive pressures

16. The Greek banking system is operating in an increasingly competitive environment. The adoption of the single currency, lowering of competitive barriers, and harmonization of the prudential framework with EU directives, has increased financing alternatives for major Greek borrowers. In addition, foreign financial firms are well placed to provide attractive asset management services to Greek depositors.

17. Greek banks face challenges competing in this environment. Legal limitations, as well as institutional factors including strong unions, hinder banks’ ability to adjust staffing levels, despite efforts to introduce more flexible labor practices. Staff and operating costs as a percent of assets have been higher than EU averages, and the level of loans per employee is lower than in EU counterparts (Table 8). Lending rates are kept high relative to European competitors by (i) a restriction on the fees and commissions that can be charged for arranging loans, resulting in banks covering fixed administrative costs through the interest rate; and (ii) a 60 basis point annual charge on the outstanding amount on any credit facility, except interbank loans and some other minor exemptions.5

Table 8.

Operational Efficiency of Credit Institutions, 2003

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Sources: European Central Bank; and Bank of Greece.

18. Banks are profiting from high intermediation spreads, particularly in retail business. Net interest income was equivalent to 2.7 percent of assets in 2004, compared to 1.3 percent in the euro area in 2003, and represented 75 percent of gross income compared to 53 percent (see Table 3). This reflects the high interest rate spreads that are still available in growing retail markets, particularly in lending to households (Figure 4). While spreads will remain higher than in the euro area, partly for the reasons mentioned above, interest rates are expected to fall as the market matures and credit growth slows.

Figure 4.
Figure 4.

Interest Rate Spreads 1/

Citation: IMF Staff Country Reports 2006, 006; 10.5089/9781451816259.002.A001

Source: Bank of Greece.1/ Difference in simple averages of bank rates on outstanding balances of consumer loans with initial maturity up to one year and savings deposits.

Risks from diversification of funding

19. Lending growth and the lengthening duration of assets have led banks to seek new funding sources in the capital markets. Overall, bank credit is growing more rapidly than deposits (Figure 5), and the maturity of bank loan portfolios is lengthening as mortgage lending increases. To raise new funds and mitigate potential duration mismatches, banks are issuing bonds, medium-term notes, and structured products, as well as securitizing receivables (Table 9). However, these new funding sources are relatively costly given the small size and low credit ratings of Greek issues. Smaller banks may have particular difficulties in obtaining such funding, while increasing their reliance on short-term sources could generate significant maturity mismatches.

Figure 5.
Figure 5.

Commercial Bank Loan to Deposit Ratio

Citation: IMF Staff Country Reports 2006, 006; 10.5089/9781451816259.002.A001

Source: Bank of Greece.
Table 9.

Issuance of Capital Market Instruments by Large Private Banks 1/

(In millions of euros)

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Source: Bank of Greece.

NBG, Alpha, EFG Eurobank, Emporiki, and Piraeus.

Accumulated to mid-June.

Approximate.

Includes senior and subordinated debt tranches. As a result, some double counting with subordinated debt is possible.

20. In response, banks are turning to securitization (see Table 9). Although issuance has been relatively limited so far, several additional securitizations are planned for the next two years. Mortgage-backed issues have been the most commonly used, although credit card and car loan receivables have also been securitized. The minimum issuance for securitization to be cost effective may limit the scope of small banks to use these instruments; alternatively they might choose to develop mechanisms to pool receivables and issue jointly.

State ownership of banks

21. Despite a significant privatization program, the government retains important influence in the banking sector. The presence of state-owned institutions fell from 63.2 percent of total assets at the end of 1998 to 25.6 percent in 2004. Majority government control now remains in ABG (8.3 percent of banking system assets), the Postal Savings Bank (4.6 percent), and the Loans and Consignments Fund (3.6 percent).6 The state also retains influence in NBG and Emporiki (about 30 percent of system assets) through minority shareholdings of state pension funds. Currently, the government does not appear to influence financial decisions of the banks. Nevertheless, in 2004, the new government used this influence to change bank management in ABG, NBG, and Emporiki. Such practices could raise uncertainties in the market about the role of these institutions during adverse economic periods.

22. The transition of the Postal Savings Bank from a specialized to a universal bank raises issues. The Postal Savings Bank does not offer a full range of services, but has applied for a full banking license. The BoG will require that the bank comply with all prudential requirements and have adequate risk management capabilities, but staff capacity may lag. Moreover, the bank’s full deposit guarantee will be rescinded but the public may still perceive their deposits as being fully guaranteed.

Risk management framework

23. The internal risk management systems used by the banks to evaluate and manage risks, while improving, remain limited. Independent risk management departments are relatively new and generally are not integrated into the banks’ decision-making processes (for example, risk-based capital allocation is not widely applied). Second, credit risk models are still new or being developed, and, given the lack of historical data over a full credit cycle, the probability of default (PD) estimates may be biased downwards.

24. Effective risk management is constrained by financial reporting standards. While the introduction of IFRS will improve disclosure, only listed companies and banks (about 30 percent of all companies) will report according to IFRS. Unlisted institutions will continue to report according to Greek Generally Accepted Accounting Principles (GAAP), limiting overall transparency.

25. The legal framework for financial activities is considered adequate and largely uncorrupt but slow.7 The banking system can enforce contracts, and take possession of, and realize, collateral. Market participants consider the court system to be fair, without bias against the banks. However, commercial laws are reported to be prodebtor and the legal system to operate slowly. Seizure of collateral averages four years, compared with only half the time on average in the EU. In addition, creditors are only eligible for compensation after all claims have been met, increasing the cost of loan enforcement.

Stress tests

26. Stress tests found that the Greek banks’ ability to withstand risks is good, with credit, equity, and interest rate risks having the largest impact on capital (Box 1). The largest adverse effect was found for a domestic macroeconomic shock (modelled as a sharp decline in consumption and investment, leading to GDP growth of zero during a one-year period), which resulted in a 9.9 percent decline in regulatory capital. Aggregate CAR remains well above the regulatory minimum in this scenario, with only one small bank falling below the minimum capital requirement, largely because of its relatively high initial NPL ratio.8 Market risk stress tests highlighted the importance of interest rate and equity price risk, but again, only one bank fell below minimum capital requirements as a result of the shocks. Although the impact was small, the interest rate shock stemmed mostly from positions on the banking book, suggesting that interest rate risk may not be being managed optimally. Banks maintain structural long positions in interest rate risk, with unhedged exposures concentrated at the long end of the curve. Use of derivatives is growing, but is still low given the size and complexity of the banking books. The relative impact of equity risk is due to the significant size of strategic equity participations held by the Greek banks.

Stress Test Methodology and Results

Stress tests were performed to assess the sensitivity of the banking system to exceptional but plausible shocks. The sample of institutions included the five largest and two medium-sized commercial banks, representing 74 percent of commercial banking sector assets (excluding specialized institutions). In addition, ABG was subjected to all shocks except to credit risk stress tests. The tests were undertaken by the bank supervision department of the BoG with information provided by the banks, using methodologies agreed in consultation with IMF staff. Results were reported in consolidated form.

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To measure credit risk, two macro scenarios were specified: (i) a two year economic slowdown with zero growth in the second year, resulting from exogenous shocks; and (ii) an external crisis scenario, where the euro area nominal interest rate reaches 5 percent during a two-year period. The initial results suggested that the first scenario—more extreme than historical experience—had a larger impact, generating a 36 percent deterioration in NPLs. However, given the structural breaks in the data due to the changing definitions of NPLs, the rapid development of the credit markets and the results from an IMF study of the relationship between NPLs and the economic cycle in other countries, it was decided to assume a much stronger deterioration in NPLs of 60 percent.1 A one to one relation was assumed between deterioration in NPLs and PDs, so that PDs were also increased by 60 percent. The results indicate that the shock caused one of the banks to fall below the minimum CAR. This is a small bank which recapitalized after this exercise was completed. Risks from exposure to Southeastern Europe and to specific sectors (e.g., textiles, construction, and shipping) were also examined, but were not found to be significant (e.g., doubling the NPLs of subsidiaries in Southeastern Europe had an impact of only 1.1 percent of regulatory capital).

Market risk was also assessed using shocks larger than recent historical experience. Interest rate risks were tested by measuring the impact of parallel shifts, steepening, and flattening, of the yield curve, with the 200 basis point parallel shift having the largest impact (a 5.9 percent reduction in the banks’ CAR). Equity risk was tested by a simultaneous fall in equity prices of 30 percent for mature markets and of 50 percent for emerging markets, leading to a 7.7 percent fall in CAR (76 percent of this impact was concentrated in the banking book).2 Exposure to Greek sovereign bonds was also tested (by increasing the spread over Bunds by 50 bp), but only resulted in a 2 percent reduction in CAR, reflecting declines in the banks’ position in government bonds. Exposure to a widening of corporate bond spreads was found to be minimal. Finally, exchange rate risk was found to have on average only a relatively small impact.

1 Financial Soundness Indicators—Background Paper, May 14, 2003.2 The table shows results below the 8 percent minimum for market risk. Such results were for one small institution in our sample and the tests were severe, as they applied to both the trading and investment portfolio

27. The BoG revised the supervisory regime for bank liquidity, establishing mandatory liquid assets and mismatch ratios.9 In order to test banks’ liquidity positions, the ratios were calculated based on end-2004 data (before the new ratios became binding). The results raised concerns about the ability of some of the larger banks to meet the ratios. The affected banks subsequently made appropriate adjustments, and the liquidity ratios become mandatory in July 2005.

28. Interbank contagion channels appear limited. Gross interbank exposures are estimated at only 1.2 percent of the banking system’s assets, and are with high quality counterparties concentrated among the largest Greek banks and in the euro area.

B. Insurance Sector

29. The insurance sector is small, with less than 4 percent of financial sector assets. While the sector experienced strong growth in 2003 and 2004, Greece remains relatively underinsured, with premiums per capita under € 300 compared with the EU average of € 2,100. Market penetration is low, with gross domestic premium income equal to 2.2 percent of GDP in 2004, compared with 9 percent in the EU (Figure 6). Despite fragmentation—the sector was composed of 97 companies at end-2004—most are very small and premium generation is concentrated in the five largest firms.

Figure 6.
Figure 6.

Insurance Premiums

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 006; 10.5089/9781451816259.002.A001

Source: Association of Greek Insurance Companies.

30. Industry profitability has been poor and volatile, reflecting intense competition and poor supervision (Table 10). Inadequate supervision and enforcement of regulations has allowed aggressive competitors to underprice the market by failing to constitute adequate technical reserves, often resulting in failures. The industry reported losses in 2002, stemming mainly from the third-party motor insurance business, where competition has been most acute, and failures concentrated. Risk and asset-liability management techniques are not used on a widespread basis.

Table 10.

Insurance Sector: Selected Indicators

(In billions of euros; unless otherwise stated)

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Source: Association of Greek Insurance Companies.

31. The insurance sector is relatively inefficient. The small size of the market has slowed the development of a well-trained labor force, impedes firms from reaping scale efficiencies, and limits profitability. Premium generation per employee is well below European averages (Table 11).

Table 11.

Direct Gross Premium per Employee

(In millions of euros)

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Sources: Association of Greek Insurance Companies; and the Organization for Economic Cooperation and Development.

32. Bancassurance accounts for only a small portion of premium generation, but is profitable and growing rapidly. Seven commercial banks—including the five largest—have an active presence in the insurance market, either through subsidiaries or strategic alliances with international insurance companies. The sector represents an attractive opportunity for banks to diversify income and risk. However, failure to establish effective supervision in a timely manner could allow for more insurance company failures through under-reserving, may generate scope for regulatory arbitrage, and could limit the long-term potential of the market.

C. Capital Markets

33. The market capitalization of the Greek stock exchange is in line with European counterparts but the level of turnover is significantly lower. Market capitalization of the ASE is equivalent to 56 percent of GDP in 2004, similar to European stock exchange averages (Table 12). While recovering from sharp declines in 2001 and 2002, the liquidity in the market remains low (Figure 7). For 2004, the turnover ratio was 36 compared with 123 in Milan, 128 in Madrid, and 184 in London.10 Moreover, stock trading is highly concentrated: of the 360 listed securities, the 4 most actively traded accounted for an average of 46.6 percent of turnover by value in 2004.

Table 12.

Size of the Capital Markets

(In percent of GDP, 2004)

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Source: IMF Global Financial Stability Report (September 2005).
Figure 7.
Figure 7.

Market Capitalization and Trading Volume of the Athens Stock Exchange

Citation: IMF Staff Country Reports 2006, 006; 10.5089/9781451816259.002.A001

Source: Bloomberg.

34. The Greek capital market has a limited range of products. The core product is the ordinary share and, at present, there are no convertible or preference shares in any volume. More importantly, there are few corporate bond issues and almost no secondary market transactions. As a result, the stock market does not provide instruments for the development of asset management and pension funds. The mutual fund industry is relatively small, and is dominated by the banks. About half of the industry’s assets are in money market funds, invested principally in government bonds. (Table 13).

Table 13.

Bank Deposits and Market Funds

(In billions of euros; unless otherwise stated)

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Sources: Bank of Greece; and Hellenic Capital Markets Commission.

35. In line with wider European trends, the corporate bond market is small, but growing. The total outstanding value of long-term securities issued by nonfinancial firms jumped more than fourfold in 2000, albeit from a very low base, and, by almost 60 percent between 2002 and 2004 (Table 14). However, only five bonds were listed on the ASE in 2004, reflecting increasing use of European markets. Short-term securities issuance is insignificant.

Table 14.

Debt Securities of Nonfinancial Firms

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Source: Bank of Greece.

36. The stock market has a limited role mobilizing resources. An average of only € 1.2 billion was raised during 2001–2003, falling from this already low level to € 680 million in 2004. Derivative markets are also limited. Trading volumes in futures and options (traded on the Athens Exchange Derivatives Market) are low. While banks use interest rate swaps and currency futures to hedge exposures, they are not active in credit derivatives markets. Greek insurance companies are not active in derivatives markets.

37. The future role of capital markets may be constrained by limited financial disclosure. Approximately 70 percent of Greek companies are not listed on the ASE and, therefore, are not required to report under IFRS. As a result, balance sheets are not comparable between companies using IFRS and those not using it. While the authorities do not believe that the uneven introduction of IFRS will create incentives for companies to delist or remain unlisted, the consequences of leaving some companies reporting under Greek GAAP should be monitored.

D. Pension Funds

38. The Greek pension system is mostly made up of defined benefit schemes, funded on a pay-as-you-go basis. There are 95 funds, comprising 26 primary and 69 auxiliary funds, offered by industry groups.11 Securities investments are largely in Greek government bonds, a significant proportion of which are managed by the BoG on behalf of the pension funds. The pension system is fragmented both across sectors of employment and by type of protection. Funds provide coverage for retirement, disability, life insurance, and health care. Total expenditure by the pension system is estimated at the equivalent of 12 percent of GDP.

39. No single body is responsible for the regulation and supervision of pension funds, or for oversight of pension fund investments. Since 2003, pension funds operate as partially self-governed nonprofit legal entities, separate from the sponsoring entity. Supervision is exercised by the ministry of employment and social protection. While the funds have only limited resources, they can freely invest one quarter of funds received and, currently. There is no oversight of such investments. Reporting requirements for pension funds are minimal and cover some statistical reports only. The BoG committee overseeing pension fund investments has been inactive since 2004. The lack of a comprehensive pension fund supervision and regulation poses an important risk for the pension system. This risk will grow as private pension funds (second pillar funds) are introduced and expand.

E. Market Infrastructure

Markets and systemic liquidity

40. The Greek banks use euro area interbank, repo, and foreign exchange markets for liquidity management. Access to these markets has improved the depth and liquidity of funding instruments and largely eliminated currency risks. Net placements by Greek banks in the European interbank markets represent almost 70 percent of total interbank placements of the Greek banking system.

41. The BoG provides liquidity to the banking system with instruments and rules defined in the operational framework of the European System of Central Banks (ESCB). Banks participate in the standard open market operations auctions of the euro system, and can access overnight liquidity at their discretion through standing facilities, such as the marginal rate facility, on acceptable collateral. The only Greek securities currently eligible as collateral are Greek government bonds (the BoG has yet to define any securities eligible as Tier II collateral, citing both the lack of adequate supply of such securities and lack of demand from the banks).

42. The role of domestic securities markets in providing bank liquidity is limited but increasing. The BoG manages a liquid market for government bonds, but the secondary market for Greek corporate bonds is small and illiquid. Beginning in 2002, corporations began issuing bonds purchased by banks rather than borrowing directly for tax purposes. These bonds, however, are held to maturity and are not traded actively. In 2003, a law was approved facilitating the issuance of corporate bonds but issuance of complex instruments, such as convertible bonds, remains restricted.12 Banks have begun to use securitization to mobilize resources and reduce maturity mismatches, but activity to date has been limited.

Payments and securities settlement systems

43. The payment system in Greece is fully integrated into the EU-wide system. The Greek system, HERMES, is a real-time gross settlement system, connected to TARGET that handles large value and cross-border transactions. The Athens Clearing Office (ACO) handles retail and large value paper checks. An additional payment system—DIAS—is owned and operated by a consortium of banks and handles electronic retail transactions (e.g., automated teller machines and debit cards) (Table 15).

Table 15.

Payment and Settlement Systems Ratio of Transactions Value to GDP

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Sources: Bank of Greece; Athens Stock Exchange; and the European Central Bank Blue Book.

Includes transactions on EURO HERMES (integrated into HERMES in 2001) in 1999 and 2000.

The ACO ceased to clear credit transfers in 2000.

44. The lack of clear rules in case a member fails to settle on the ACO represents a potential vulnerability. The authorities indicated that nonsettling members would not necessarily be excluded from the system on the next day. Rather, the BoG maintains full discretion on the treatment of such members. This policy creates uncertainty among market participants about whether or under what conditions they would qualify for emergency credit from the BoG. Clear rules and qualifications should be established to eliminate this uncertainty.

45. Securities transactions are cleared and settled through the CSD of the ASE. Analogous functions for derivatives are undertaken by the Athens Derivatives Clearing House. The systems for trading, clearance and settlement, and registration of title are fully dematerialized. Risks in the securities settlement system are partially constrained by the Athens Exchange Members’ Fund (AEMF). All investment securities firms must join the AEMF, which will compensate ASE members in the face of counterparty default. An auxiliary fund is available to cover settlement risk for brokers.

Accounting framework

46. Effective 2005, Greece adopted IFRS but implementation will be challenging. Successful uptake of the new standards will require extensive educational efforts. Listed corporations will have to prepare quarterly financial statements according to IFRS beginning in 2005, requiring a number of changes in financial reporting and auditing practice. Many chartered accountants have had limited exposure to the new system and are not yet in a position to provide advice to their audit clients. Moreover, only companies and banks listed in the ASE will report in accordance with IFRS, while unlisted institutions will report according to Greek GAAP; this uneven implementation will limit transparency.

47. The implementation of IFRS accounting may reduce banks’ regulatory capital. The new rules will require a tightening of loan loss provisioning through a more comprehensive assessment of impaired assets, and the introduction of rules on valuing financial instruments and hedging activities, as well as the recognition of employee benefits including pension liabilities in the balance sheets. The BoG, along with other European supervisors, is in the process of developing prudential filters to allow changes in the calculation of regulatory capital due to the adoption of IFRS to be phased in.

III. Strengths and Challenges of the Stability Framework

A. Regulation and Supervision

48. Financial sector regulation is uneven. While bank supervision is strong, weaknesses in insurance supervision and, to a lesser extent, in capital market supervision raise concerns about the uneven regulatory playing field. Although insurance remains a small portion of overall financial sector assets, bancassurance has growth potential, raising the possibility that financial institutions mask excessive risk through regulatory arbitrage. For this reason, implementation and strengthening of the overall regulatory framework is essential.

Banking supervision

49. The bank supervision framework is generally strong, but could be further enhanced. Remaining steps include strengthening legal protection against suit for both the BoG itself and its staff; the current law is interpreted as providing some protection, but this is not explicit and could be contested. Secondly, the overall risk assessment made by the BoG could be expanded to cover noncredit risks more comprehensively, including market risk, liquidity risk, and operational risk. Finally, the BoG should continue to closely monitor evolving market practices, and adapt their risk analyses to reflect innovation. The BoG should monitor new risk management methodologies being adopted in the market.

50. Collection and publication of economic data could be strengthened. Publication of banks’ financial statements has been delayed, in part reflecting the introduction of IFRS. Steps to address such delays will improve transparency and enhance market discipline. The frequency with which the BoG receives some of the data is received should be reviewed and the analysis of bank risks focused more broadly on total risks facing the banks. Data collection within the BoG could also be more systematic, with differences between supervisory and economics department data harmonized.

Insurance supervision

51. Supervision of the insurance sector has been constrained by limited supervisory resources. Supervision consists largely of the off-site assessment of solvency and monitoring compliance with formal licensing criteria rather than a full risk assessment. Limited on-site inspections began only in 2003. The basic frameworks are in place, but need to be strengthened and made more flexible to cope with changing conditions. In addition, while minimum legal requirements are now in place, supervisory guidance on implementation is either absent or inadequate.

52. The authorities are reforming the supervisory framework. A new supervisory agency—the ISC—should be operational by early 2006. A chairman has been appointed, and other members of the Board of Directors are being selected. The deputy chairman of the Board will be the president of the Association of Greek Insurance Companies, and the Board will also include representatives of the Consumer Protection Directorate, the Actuarial Association, a representative of the Insurance Brokers Association, as well as representatives of the ministry of finance (MoF) and the ministry of development (MoDV). The ISC will update the regulatory framework. While the ISC is expected to significantly improve on the current supervisory arrangements, the following observations should be noted:

  • The new agency will take time to become fully effective. Care should be taken that adequate staffing and resources are provided to ensure the agency is operational as quickly as possible.

  • The composition of the Board of the ISC raises concerns about its independence. While the new agency will need to be sensitive to legitimate concerns of the industry, the current composition does not free the agency from political and industry interference.

  • The new agency will report to the MoF rather than the MoDV. A clear delineation of responsibilities between the ISC and the MoF is warranted.

Securities regulation

53. Securities regulation and supervision is considered sound. The HCMC is responsible for the regulation of investment firms, mutual fund management firms, portfolio investment companies, the ASE, and the securities clearing and settlement systems. The HCMC has adequate powers to monitor market institutions and practice.

54. Steps could be taken to strengthen the market oversight of the HCMC. Procedures and programs need to be established for surveillance and compliance with IFRS and international audit standards that came into force in 2005. In addition, a number of recommendations were made to strengthen the supervisory oversight which include:

  • Making the HCMC more independent in planning the allocation of its staff and resources within an overall budget.

  • Subjecting the appointment of all members of the executive committee (not just the chairman) to some form of public scrutiny.

  • Implementing a code of conduct for staff covering general policies and procedures for disclosing and managing conflicts of interest.

B. Safety Nets

55. The safety net and crisis management system provides a large degree of flexibility. In dealing with weak banks, the BoG can provide emergency liquidity assistance within the limits of the operational framework of the ESCB, appoint a commissioner, and extend the repayment period of a bank’s liabilities or revoke its license, without the legal framework triggering or prescribing a specific course of action. The BoG has not established criteria to guide this decision process, stressing the importance of maintaining flexibility in their policy response. While this approach has the benefit of allowing the BoG to calibrate its response to specific circumstances, it does not include clear internal procedures for activating and applying the safety net.

Emergency liquidity assistance

56. In addition to the standing facilities, the BoG can provide emergency liquidity assistance to financial institutions within the limits of the operational framework of the ESCB. The decision to grant emergency liquidity assistance is made by the governor of the BoG, on the recommendation of the Banking and Credit Committee, and within the framework established by the ECB. If the financial institution has insufficient collateral, there is the presumption that the BoG would not provide liquidity. However, the general council of the BoG can authorize use of a broader range of collateral than is used for standard monetary operations—in theory any asset, including loans, could be authorized. The criteria for determining systemic importance have not been made public to limit moral hazard. Disclosure, in general terms, of the procedures the BoG would follow, however, could strengthen the market’s understanding of the process.

Crisis management and bank resolution

57. The BoG stresses the need for flexibility in its management of an emerging crisis. The Banking and Credit Committee, conformed by the BoG governor, two deputy governors, and six directors of the BoG, regularly discusses banking problems and has the authority to take remedial measures. More recently, a crisis management committee has been appointed.

58. A clearer view of the key steps to be followed would make the process more efficient. The memorandum of understanding recently signed by banking supervisors, central banks, and finance ministers of the EU formalizes the commitment to develop national as well as Europe-wide contingency plans for the management of financial crises. For this purpose, the BoG might identify key aspects, including information requirements, critical steps to be followed, contact lists for critical personnel, communication issues, and general principles including the role of public funding.

Deposit insurance

59. The deposit insurance system (TEK) is founded on EU directives and is generally sound. However, several aspects of the system raise potential vulnerabilities. Specifically:

  • A total of 80 percent of TEK’s assets are invested with the participating banks, so a failure of one bank will (i) reduce the available resources for the deposit payout; and (ii) potentially put liquidity pressures on other banks.

  • The deposit insurance agency does not know the amounts of the insured deposits by banks; this information is maintained by the bank.

  • The deposit insurance fund does not have access to special financing (either from the BoG or from the MoF) in case the fund is exhausted. Rather the agency would be expected to raise funds from banks through extraordinary premiums.

60. Consideration should be given to improving the efficiency of the TEK. The TEK would be able to respond more efficiency to bank failure were information on the insured deposits by bank available. Payout of deposits would be faster and less subject to fraud. Similarly, the credibility of the deposit insurance framework would be strengthened by establishing a contingent line of credit for the TEK.

C. Anti-Money Laundering and Combating the Financing of Terrorism Issues

61. Greece has put in place some essential components for an AML/CFT framework, but further refinements are needed to meet international standards.13 While the legal and supervisory arrangements based on the Anti-Money Laundering (AML) Law (Law 2331/1995) cover the traditional financial sector, there are issues of implementation and coverage. The designated nonfinancial businesses and professions (DNFBPs) are not covered, compliance with the AML/CFT obligations is uneven, and supervisory practices vary. Greece’s Financial Intelligence Unit (FIU) does not currently have the structure, powers, and skills required under the FATF standard. Greece has had some successes in prosecuting money laundering, but judicial practice has only recently clarified certain aspects of the offense. The definition of financing of terrorism does not fully meet the international standards.

62. The overall effectiveness of Greece’s AML/CFT regime should be strengthened. The following key areas for improvement were identified: (i) development of a coordinated institutional framework; (ii) transparency and governance in certain key economic sectors; (iii) enhancing awareness of money laundering and terrorism financing risks in all sectors; (iv) early development and implementation of measures to combat financing of terrorism in the financial sector; (v) implementation of AML/CFT measures in the DNFBP sector; (vi) enhanced supervision for compliance with AML/CFT standards particularly in the insurance and securities sectors; and (vii) general improvement in efficiency in key public sectors, notably the judiciary and law enforcement.

63. The Greek authorities are taking steps to address some aspects of these weaknesses. They have drafted legislation to amend the primary AML Law in order to strengthen the existing preventive measures, develop a framework for combating the financing of terrorism, implement AML/CFT policies in the DNFBP sector, and strengthen the role of the FIU.

ANNEX: Observance of Financial Sector Standards and Codes— Summary Assessments

The annex contains summary assessments of international standards and codes relevant for the financial sector. The assessment has helped to identify the extent to which the supervisory and regulatory framework is adequate to address the potential risks in the financial system.

The following detailed assessment of financial sector standards were undertaken: the Basel Core Principles for Effective Banking Supervision (BCP) by Christo Wiese, (former Head of Banking Supervision, Reserve Bank of South Africa) and Peter Phelan (formerly of the Bank of England and the U.K. Financial Services Authority); the International Association of Insurance Supervisors (IAIS) Insurance Core Principles assessed by Michael Hafeman (formerly of Office of the Superintendent of Financial Institutions, Canada); the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation assessed by John Farrel (formerly New Zealand Securities Commission); and the FATF 40 Recommendations for Anti-Money Laundering and eight special recommendations on Combating the Financing of Terrorism by Peter Csonka (team leader, LEG), Manuel Vasquez (MFD), Joy Smallwood, Marlene Manuel, and Yehuda Shaffer (all LEG).

Basel Core Principles for Effective Banking Supervision and Transparency of Banking Supervision

General preconditions for effective banking supervision

64. The legal environment within which the banking system operates in Greece is broadly satisfactory, although enforcing contracts, especially when they involve the realization of collateral, necessitates recourse to the courts, which is time-consuming. There are plans to introduce remedies to speed these processes up, as well as replace the current Companies Law with something that is more up-to-date.

65. The accounting and auditing regime is also in the process of being upgraded, although this will take a number of years. Banks have just started using IFRS, but it is likely to be some five years before these are fully introduced across the whole economy. There are no Greek auditing standards, but it is intended to apply international ones by 2007. In the meantime, Greek banks need to be cautious in their evaluation of the financial information that they receive from their customers.

66. The payment systems of the country are satisfactory and fully linked into the EU system, and the deposit protection scheme is in conformity with the relevant EU directive.

Main findings

67. The assessment of Greece under the Basel Core Principles (BCPs) was conducted by two persons14 and was based on a self-assessment carried out by the Greek authorities, a review of laws and regulations, and discussions with the banking supervisors, lawyers, and accountants, together with a number of banks.

68. The Greek authorities chose to be assessed against both the essential criteria and the additional criteria of the BCP, which meant that they were assessed against international standards of best practice as is appropriate for an EU member country.

69. The Greek supervisory regime is essentially sound. Greece is fully compliant with 22 criteria, largely compliant with eight (including the overall assessment for BCP 1), and materially noncompliant with one.

70. The assessors received all the help that they needed from everyone that they dealt with, and would like to express their grateful thanks to all.

Objectives, autonomy, powers, and resources (BCP1)

71. The legal environment for banking supervision has been extensively updated over the past fifteen years and care has been taken to ensure that all the requirements of EU directives have been fully incorporated into Greek Law. Apart from supervision carried out by other EU supervisors under the EU ‘passport,’ the only banking supervisor in Greece is the Bank of Greece (BoG). The BoG has all the powers that it needs to carry out effective supervision (including authorization and license revocation), is appropriately resourced, has the necessary independence, and can and does cooperate effectively with other supervisors, both at home and abroad. The only problem under this heading is that the BoG and its staff may well not have the necessary legal protection against lawsuits for undertaking their work in good faith and without negligence.

Licensing and structure (BCPs2—5)

72. The banking laws provide a robust regime under which the activities of banks can be clearly defined, the use of the term ‘bank’ is reasonably well-controlled, ownership changes of banks can also be controlled, and the BoG can ensure that major investment decisions of banks have to receive its approval. A comprehensive regime for the authorization of banks is also in place.

Prudential regulations and requirements (BCPs6—15)

73. The BoG’s capital adequacy regime is Basel compliant with a minimum ratio for commercial banks of 8 percent, which has been increased to 9 percent or 10 percent in certain cases. All cooperative banks have to meet a 10 percent ratio. The BoG also has supervisory requirements in place for the supervision of country and market risks, which are appropriate to the current development stage of the Greek banking system. There are also adequate regulations and controls over connected lending and lending concentrations. Supervision of internal controls is also effective.

74. The supervision of credit and provisioning is broadly satisfactory but more detailed guidelines for supervisors on the standards that should apply in both these areas would be helpful. There is also sometimes some confusion as to whether facilities are being considered on a portfolio or a line-by-line basis.

75. More work is needed on the supervision of operational risk where there is much that is not currently covered and liquidity risk supervision needs strengthening with better information on the position of individual banks, together with the introduction of mismatch guidelines by the BoG. Some, at least, of this is in hand. The AML supervision is also generally sound, save that the latest recommendations of the FATF have yet to be incorporated into Greek law.

Methods of ongoing supervision (BCPs16—20)

76. The information that the BoG obtains for its supervision is adequate, on-site and off-site staff work well together, and there is appropriate contact with the management of banks, save that more time should be spent with directors as well as management. On-site work is thorough and professional and off-site analysis is also generally satisfactory. However, more resources should be applied to on-site work with more frequent reviews of internal control systems, in particular. A more structured regime for contacts with external auditors should also be put in place.

Information requirement (BCP21)

77. The BoG’s information requirements cover what is needed, but the frequency with which some of the data is received should be reviewed. Analysis is sometimes too narrowly focused with insufficient attention to the total picture.

Formal powers of supervisors (BCP22)

78. The formal powers of the BoG are fully adequate and there is evidence that these are used effectively. However, the regime for resolving problem situations would be enhanced were the BOG to develop contingency plans for possible problem situations including scenario simulations.

Cross-border banking (BCPs 23–25)

79. Both the legal environment and practice in this area are fully satisfactory.

Main recommendations
Table 1.

Recommended Actions to Improve Compliance with the Basel Core Principles

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Authorities’ response

80. The BoG thanks the IMF mission for the cooperative spirit and objectiveness, as well as the fruitful discussions and consultations during the course of the assessment.

81. The Report recognizes that the Greek supervisory regime is largely compliant with the Basel Core Principles for Effective Banking Supervision. The assessment highlights the progress in the legal framework for the banking supervision over the past fifteen years and the adequacy of prudential regulations.

82. The BoG acknowledges that most of the observations of the IMF’s mission are well grounded. Therefore it will be addressing identified shortfalls with measures that have either already been undertaken or are planned for the near future.

83. Specific comments on the main IMF recommendations are the following:

  • On BCP 1.5 the BoG has submitted the second draft proposal on legal protection to the ministry of finance, with the aim to provide protection to supervisors against legal actions brought by third parties in response to regulatory and supervisory measures adopted in good faith in the performance of their duties.

  • On BCP 7 the BoG is preparing manuals for the supervisory processes, both on- and off-site. The respective manuals intend to provide formal guidelines with procedures and measures aimed at controlling banks’ credit risks on a consistent and uniform basis, as well as ensuring the compliance of bank examiners with prescribed methodologies. Inevitably, the manuals will incorporate forthcoming CEBS’ guidelines for the convergence of supervisory practices towards Basel II implementation.

  • On BCP 8 the BoG has issued Governor’s Act 2565/11.10.2005 on the adequacy of loan loss provisions for claims arising from lending, amending the supervisory treatment of mortgage loans regarding the calculation of provisions with the attention to more closely align provisioning policy with respective credit risk exposures. More specifically (a) the reduced provisional supervisory coefficients do not longer apply for mortgage loans that are past due for more than a year; and (b) the banks are required to incorporate in their internal control and risk management systems additional criteria for the approval or rejection of the granting of loans during the pre-screening process, a key criterion being the relationship between the monthly installments and the level of disposable income ranging between 30 percent and 40 percent. Should this criterion not be incorporated and used, the BoG will require additional specific provisions/reserves.

  • On BCP 13 the BoG has issued the Governor’s Act 2560/01.04.2005 on liquidity requirements of credit institutions, introducing compulsory liquidity and asset mismatch ratios and formalizing the framework for the monitoring of liquidity. Hence, the BoG sets out guidelines for sound liquidity management and gains valuable insights on credit institutions’ maturity transformation.

  • On BCP 14 the BoG has initiated the process of revising and complementing the Governor’s Act 2438/06.08.1998 on credit institutions’ internal control systems and processes, so that it becomes more targeted. It will explicitly mention the compliance functions, the conflicts of interest issue, as well as guidelines on specific risk areas. The consultation with the banks is expected to be completed by the end of 2005.

  • On BCP 16 newly hired personnel has been appointed both to the on- and off-site supervision departments further reinforcing them.

  • On BCP 22 the BoG is in the process of compiling all internal crisis management procedures into a manual for Contingency Planning Arrangements, a large part of which has already been prepared.

International Association of Insurance Supervisors Insurance Core Principles

General

84. This report summarizes the results of an assessment of the observance of the Insurance Core Principles (ICP) of the IAIS in Greece. Insurance is supervised in Greece by the Directorate of Insurance Enterprises and Actuaries (referred to in this report as Insurance Directorate or ID) of the MoDV. The ID is responsible for prudential and market conduct supervision of insurance companies and intermediaries. This assessment was done in the context of the IMF and World Bank FSAP, using the ICP dated October 2003. It was conducted during a mission to Greece from April 4 to 18, 2005 and is based on the laws, regulations, policies and practices in place at that time. Although Greece is undergoing significant changes in its supervisory structure, prospective changes have not been considered in the assessment. The report includes recommendations for strengthening the supervision of insurance.

85. Major sources of information used for the assessment included the answers to the questionnaire submitted by the IMF prior to the mission, translations of relevant legislation, and additional background information provided by both the ID and the Association of Insurance Companies. Extensive meetings were held with management and staff of the ID to discuss each of the criteria within the ICP. In addition, meetings were held with representatives of a wide range of organizations: the Association of Insurance Companies; the head of the new ISC; the MoF; the Hellenic Actuarial Society; the Institute of Certified Public Accountants of Greece (SOEL); the Panhellenic Association of Experts; the Association of Assessors; Hellenic Association of Insurance Brokers; partners of several auditing firms; and senior executives of several insurance companies. All concerned gave willingly of their time and were cooperative, and this added significantly to the effectiveness of the assessor.

Institutional and macroprudential setting—Overview

86. While the insurance sector in Greece experienced strong growth in 2003 and 2004, with premium increases of about 12 percent in both years, Greece remains relatively under-insured. Market penetration is low, with gross domestic premium income accounting for 2.12 percent of GDP in 2003, compared to the EU average of close to 9 percent. The total assets of the insurance companies amount to 4.54 percent of GDP in 2003. At year-end 2003, there were 19 licensed life insurance companies, 65 licensed nonlife insurance companies and 13 companies licensed for both life and nonlife insurance (composite companies). These figures include 30 branches of foreign companies, primarily operating in the nonlife sector. The industry is relatively concentrated, with the largest 5 and the largest 10 life companies, respectively, accounting for 63 percent and 89 percent of the sector’s total insurance premiums in 2003. The largest 5 and the largest 10 nonlife companies, respectively, wrote 43 percent and 58 percent of the premiums in the same year. Some of the largest companies are predominantly owned by banks. The principle distribution channels remain company-owned networks of branches and tied agents, with a small but growing use of bancassurance.

87. Life insurance products include traditional and unit-linked policies. Health insurance is a growing class of business, and has been unprofitable for many insurers. Motor insurance one of the main nonlife products, has been unprofitable and has led to the failure of many of the 45 companies whose licenses have been withdrawn in the past 20 years. A guarantee fund exists to cover the motor insurance claims of failed insurers or third-party claims involving uninsured motorists. Other nonlife products have been profitable, overall.

88. The supervisor for the insurance sector is currently the ID. An independent supervisory authority, the ISC, was created in December 2004. A Presidential Decree that will enable the transfer of supervisory responsibilities from the ID to the ISC is expected by mid-2005, while the actual transfer is expected to occur by mid-2006.

Main findings

89. Insurance supervision in Greece occurs within a legal framework that incorporates the relevant EU Directives. However, the conduct of supervision, which has been constrained by limited supervisory resources, has consisted largely of the off-site assessment of solvency and compliance with the formal licensing criteria. A limited program of on-site inspections, with the assistance of external resources, was initiated in 2003. The need to significantly strengthen supervision of the insurance sector was mentioned by all market participants interviewed and action to do so has been taken by the Greek government, through the creation of the ISC.

90. The level of observance of the ICP in Greece is mixed, with the legislative and supervisory initiatives that are currently being pursued holding the potential to materially improve the level of observance in the coming years. In some areas, where basic frameworks are in place, it has been recommended that implementation be strengthened or become more flexible to cope with changing conditions, e.g., by conducting more rigorous off-site analysis of financial information, performing regular on-site inspections, moving to a more dynamic basis for the valuation of liabilities, and establishing and communicating a solvency control level. In other cases, where either legal requirements or supervisory guidance are either absent or fairly high level in nature, recommendations focus on the issuance of more complete and explicit requirements or guidance to industry regarding supervisory expectations, e.g., in the areas of governance, risk management, and internal controls.

Conditions for effective insurance supervision

91. Greece largely meets the conditions necessary for effective insurance supervision. The harmonization of accounting standards and the development of an alternative dispute resolution mechanism would enhance these conditions.

Supervisory system

92. The changes currently underway present an opportunity to clarify and formalize the objectives and responsibilities of the supervisory authorities and to increase the level of resources devoted to insurance supervision. The documentation and publishing of supervisory policies and procedures should be expanded in the interest of greater transparency.

Supervised entity

93. More explicit legislation and guidance on corporate governance and internal control would improve observance.

On-going supervision

94. The development of a risk-focused methodology would facilitate more proactive and effective supervision. Increasing the information available to supervisors, e.g., through active market analysis and quarterly financial returns, would support the monitoring process.

Prudential requirements

95. More explicit legislation and guidance on risk management issues would improve observance. The ability of the supervisor and others to assess the financial condition of insurers could be improved by requiring more consistent and realistic valuation approaches. Solvency requirements could be strengthened, e.g., through the establishment of control levels.

Markets and consumers

96. Supervision of insurance intermediaries and certain aspects of consumer protection could be strengthened. Disclosure practices are expected to improve with the move to IFRS, although supplemental guidance would be appropriate.

Anti-money laundering/combating the financing of terrorism

97. Legislation is currently under development to update AML/CFT requirements to make them consistent with current international standards. Inspection of controls by the insurance supervisor is recommended.

Table 2.

Recommended Action Plan to Improve Observance of International Association of Insurance Supervisors Insurance Core Principles

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Authorities’ response to the assessment

98. The authorities were happy with the assessment and had no comments.

International Organization of Securities Commissions Principles of Securities Regulation

Information and methodology used for assessment

99. This summary assessment was prepared in the IMF FSAP for Greece in February/March 2005. The assessor was John Farrell (formerly with the New Zealand Securities Commission).

100. The assessment was based on the rules of law and practice about the regulation of securities and investments, the constitution, functions and powers of the securities regulator, the HCMC, the regulatory and surveillance arrangements adopted by the HCMC in fulfilling its statutory mandate, market activity and procedures adopted by firms and institutions in complying with the law, and best practice. The assessment was based on the IOSCO Objectives and Principles of Securities Regulation.

101. The background documents reviewed in the course of the assessment included the IOSCO self-assessments prepared by the HCMC; annual reports and other publications of the HCMC and the ASE; annual reports and offer documents of listed companies and others; reports on market activity; selected Greek laws, presidential decrees, rules, and codes of conduct as available in English in unofficial translation; and IOSCO reports, resolutions, and news releases. The assessment was conducted in accordance with the IOSCO implementation methodology.

102. There were extensive discussions with HCMC Board members and officers, representatives of the listed companies, firms licensed to undertake securities and investment business including members of the ASE and derivatives markets, the Central Depository Company, the Members’ Guarantee Fund, the Derivatives Clearing House, the BoG, registered banks, mutual fund management companies, and independent professional advisers such as chartered accountants and lawyers. The mission did not meet with consumer groups or independent commentators.

Institutional and market structure

103. The HCMC is a statutory body responsible as a single regulator for the regulation in Greece of securities markets and market participants including investment firms, mutual funds management firms, portfolio investment companies, the ASE (with both stock and derivative markets and a derivatives clearing house), the Central Depository Company and Guarantee Fund, and listed companies. It is a member of IOSCO and as such was a party to the IOSCO resolution adopting the Statement of Objectives and Principles in September 1998.

104. The HCMC regulates the following markets, all of which are markets of the ASE (i) main market; (ii) parallel market; (iii) new market; (iv) market of emerging capital markets; (v) fixed income instruments market; and (vi) derivative instruments market.

105. These markets are fully owned either directly or indirectly by a single company, Hellenic Exchanges S.A. (HELEX). The principal markets are the ASE main market (ASEMM) and the ASE derivative instruments market (ASEDM). There is also a wholesale government bond market, the electronic secondary securities market, which is operated, regulated, and supervised by the BoG. The ASEMM market capitalization as of December 31, 2004 was euro 92.1 billion, equivalent to 56 percent of GDP, compared with euros 84.6 billion as of December 31, 2003 and euros 65.6 billion on December 31, 2002. The ASEMM trades listed company shares, listed company bonds, and Greek government bonds. Turnover in 2004 was euros 35.8 billion, compared with euros 34.9 billion in 2003 and euros 24.8 billion in 2002. Approximately euros 95 million of new capital was raised in 2004, a smaller amount than the euros 1,468 million raised in 2003 and euros 966 million in 2002. There is a central securities depository which is responsible for clearing and settling ASEMM transactions and registering title to listed securities. The system is paperless and securities are dematerialized. There is an ASE members’ guarantee fund and an auxiliary fund. There are 360 listed securities and 80 firms licensed as members of the ASEMM. On average, in 2004 the four most active securities accounted for 46.6 percent of turnover by value.

106. Clearing and settlement of the ASEDM market is undertaken by the ASE derivatives clearing house, which is within the HELEX group of companies. This clearing house stands as counterparty to all market transactions. It holds letters of guarantee from clearing members and members’ margin accounts in respect of market transactions. Average daily volumes of futures and options trades on ASEDM in 2004 were 19,343, compared with 19,708 in 2003 and 14,851 in 2002. There are 38 clearing members and 29 nonclearing members.

107. There are five listed corporate debt instruments (bonds) with a market value of euros 209 million.

108. There is no equivalent in practice in Greece to the unlisted company, which has offered securities to the public as in many other jurisdictions and there is effectively no grey market.

109. There were 262 open-ended mutual funds having assets valued at euros 31.6 billion as of December 31, 2004 (265 funds with assets of euros 30.4 at end 2003).

110. The registered banks play a significant role in the public securities markets. They underwrite securities issued to the public as well as tender offers for listed company shares. Banks also act as custodians for mutual funds and personal investment companies. In aggregate, banks hold nearly half the shares in the company that owns and operates the ASE. The banks routinely have subsidiaries that engage in the provision of investment services and mutual funds management. The banks provide access to investment in government bonds for nonbank investors.

111. There is only a limited range of products offered in the public markets. The core products are the ordinary share and the interest in the mutual fund with highly negotiable assets. At present, there do not appear to be convertible or preference shares in any volume. More importantly, as noted above, there are very few corporate bond issues and very little trade in corporate bonds.

General preconditions for effective securities regulation

112. The first precondition for effective securities regulation is a sound regulatory policy. Greece is a member of the EU and subject to its directives including in this context two directives on undertakings for collective investment schemes and one directive each on market abuse, prospectus, listed company transparency and investment services. It is a founding member of the EU’s Committee of European Securities Regulators (CESR). Greece is also a member of IOSCO and a party to the IOSCO resolution adopting the statement of Objectives and Principles in September 1998.

113. Market institutions, market professionals, and investors should be committed to the principle of fair and honest dealing and to a culture of compliance with high standards of market practice. Market participants confirmed an improvement in the culture of market participants and an increasing familiarity with the risks as well as the rewards of investment in volatile markets.

114. The rules of law on due process and the rules of natural justice, or equivalent, should be firmly in place. There is an extensive body of administrative law bearing on this. The law courts should be accessible, efficient, reliable, skilled in commercial law matters, and unbiased. Some questions were raised with us about the effectiveness of court action.

115. Investors should be educated and generally alert to their rights. A strong commitment to investor education is necessary if securities and investment markets are to attract retail investors in increasing numbers. The financial press should be informed and responsible. The press in Athens takes an active interest in financial markets and a great deal of core information is available on the HCMC Web site. Nevertheless, there is widespread recognition of the need to commit greater resources to investor education with particular emphasis on more prudent and more effective investment by retail investors.

116. The taxation system should be neutral with respect to financial products. If there are any concerns in this general area they relate to the differential effect of investing into Greece from offshore as compared to investing from within Greece. This appears to be affecting decisions about the optimum location for the registration of new prospectuses and the offer of securities.

117. There should be effective rules of law on access of new entrants to the market. There should be diversity of market participants and products. The impediments to market competition should generally only be those which are aimed at preventing unscrupulous individuals from participating as market professionals. There is a competitive market for investment services. The ASE in practice has a monopoly in the provision of exchange services; however, there are no restrictions on membership of the ASE by suitably qualified and authorized firms. Moreover the HCMC has power to issue new exchange licenses and, if an application was received, it would be required to consider it fairly and reasonably. Moreover Greek citizens are free to invest on exchanges in other countries.

Overview of Assessment

118. The HCMC is an active and energetic regulator. It has extensive powers to monitor market institutions and market practice. It has achieved a high degree of compliance with the IOSCO principles. The country is continuing a robust program of review of relevant law and practice, having particular regard to the applicable EU directives.

119. The HCMC has an immediate and important regulatory challenge, relating to financial reporting. Greece has adopted the IFRS and the international audit standards. Both will apply in Greece to final or interim statements with balance dates beginning March 31, 2005. The HCMC is involved with others in promoting the new standards and procedures and in establishing programs for surveillance and compliance. The HCMC acknowledges that the quality of published audited financial statements in the past have not been good. The HCMC will need to demonstrate great resolution in ensuring high standards of compliance with the new rules.

Principle by principle assessment

120. Regulator—Principles 1–5—The responsibilities of the HCMC as regulator are clear and objectively stated, generally in the law. There are certain respects in which the HCMC might be operationally more independent and more accountable in the exercise of its functions and powers. The HCMC has adequate powers to perform its functions and exercise its powers. HCMC adopts clear and consistent regulatory processes. The HCMC staff commitment to high professional standards should be more explicit.

121. Self-regulatory organizations (SROs)—Principles 6–7—The regulatory regime makes use of SROs. These are subject to the HCMC oversight and observe standards of fairness and confidentiality.

122. Enforcement—Principles 8–10—The HCMC has comprehensive inspection, investigation, and surveillance powers. It has comprehensive enforcement powers and appears able to demonstrate an effective and credible use of these powers. However, it should prepare an integrated formal program of work for each financial year, monitor progress against program and report on performance at the end of the year.

123. Cooperation—Principles 11–13—The HCMC has wide powers to share both public and nonpublic information in its possession with domestic and foreign counterparts. It has established the necessary mechanisms for sharing nonpublic information with domestic and foreign counterparts. In the past it has not had an explicit general power to undertake inspections or investigations at the request of foreign counterparts, merely to communicate information already in its possession from inspections or investigations already undertaken in accordance with its core law. This position has been changed by the newly enacted Law 3340/2005 that empowers the HCMC to take “the necessary measures to gather the required information.”

124. Issuers—Principles 14–16—The law provides for full, accurate, and timely disclosure of financial results and other information to shareholders of companies and interest holders in collective investment schemes. The policy of the law is that shareholders of a company should be treated in a fair and equitable manner. However the powers of minority shareholders under the company law may be difficult to exercise and the company takeover laws are not always effective to regulate the transfer of control. There is some evidence of shareholding concentrations among listed companies. While accounting and auditing standards are of a high and internationally acceptable quality, the international financial reporting and auditing standards have only recently been adopted and there may be difficulties in ensuring compliance by all listed companies. Moreover there appear to be difficulties in administering the continuous disclosure rules for listed companies including the power of the ASE to grant exemptions in individual cases.

125. Collective investment schemes (CIS)—Principles 17–20—The regulatory system sets standards for the eligibility and regulation of those who wish to market or operate a CIS. There are rules governing the legal form and structure of CISs and the segregation and protection of client assets. The rules require disclosure as necessary for the particular investor to evaluate the suitability of a CIS for and the value of interests in it. They ensure a disclosed basis for asset valuation and the pricing and redemption of units.

126. Market intermediaries—Principles 21–24—Regulation provides for minimum entry standards for market intermediaries. There are initial and ongoing capital and other prudential requirements that reflect the risks that the intermediaries undertake. Market intermediaries must comply with standards for internal organization and operational conduct that aim to protect the interests of clients and ensure proper management of risk. However as noted above the HCMC does not have a mature integrated system for planning its monitoring and surveillance work and assessing its performance at the end of the planning period.

127. Secondary market—Principles 25–30—The establishment of trading systems is subject to regulatory authorization and oversight. There is ongoing supervision to ensure that the integrity of trading is maintained. Regulation promotes transparency of trading. Regulation is designed to detect and deter manipulation and other unfair trading practices. In this connection, Greece will soon adopt the EU directive on market abuse. Regulation aims to ensure the proper management of large exposures, default risk, and market disruption. Systems for clearance and settlement of securities transactions are subject to regulatory oversight.

Recommended actions

128. The recommended plan of actions to improve observance of the IOSCO Objectives and Principles of Securities Regulation is set out in Table 3.

Table 3.

Recommended Action Plan to Improve International Organization of Securities Commission’ Principles of Security Regulations

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Authorities’ response to the assessment

129. The authorities were happy with the assessment and had no comments.

Financial Action Task Force Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

Introduction

130. This Report on the Observance of Standards and Codes for the FATF 40 Recommendations 2003 for Anti-Money Laundering (AML) and the 9 Special Recommendations on Combating the Financing of Terrorism (CFT) was prepared by a team composed of Fund staff and an expert under the supervision of Fund staff using the AML/CFT Methodology 2004.15 The report provides a summary of the level of observance with the Financial Action Task Force (FATF) 40+9 recommendations and provides recommendations to strengthen observance.

Information and methodology used for the assessment

131. In preparing the detailed assessment, Fund team reviewed the institutional framework; the relevant AML/CFT laws, regulations, guidelines and other requirements, and the regulatory and other systems in place to deter money laundering (ML) and the financing of terrorism (FT)—through financial institutions and designated nonfinancial business and professions (DNFBPs); and examined the capacity, implementation, and effectiveness of these systems. The assessment is based on the information available at the time of the on-site visit from May 9–25, 2005 and immediately thereafter.

Main findings
General

132. The current AML/CFT regime is not working in a cohesive manner consistent with the requirements of the FATF recommendations. Greece has put in place some essential components for an AML/CFT framework but much remains to be done, including compliance with the 2nd EU Directive which is long overdue. AML/CFT is not perceived by all stakeholders as a priority issue, the institutional arrangements are fragmented, and the resources devoted to AML/CFT activities are limited. The mission identified a number of legal, institutional, and structural issues that require urgent attention if Greece is to achieve compliance with the FATF recommendations. Key among these are, inter alia, (i) the need of a coordinated national AML/CFT strategy and institutional framework to implement the required legislative and institutional reforms; (ii) improved transparency and governance in key sectors (e.g., gaming and securities); (iii) enhanced public and private sector awareness of ML/FT risks particularly in the securities, insurance, and DNFBP sectors; (iv) implementation of measures to combat FT; (v) implementation of AML/CFT measures in the DNFBP sector; and (vi) general improvement in efficiency, morale, and effectiveness in certain public sectors, notably the judiciary and law enforcement.

133. The Greek authorities concur on the need to strengthen AML/CFT compliance in the identified areas and have taken important steps to address some of them. They have drafted legislation to amend the primary AML Law (Law 2331/1995) which will strengthen existing AML measures, develop a framework for CFT, impose AML/CFT requirements on the DNFBP sector, and strengthen the role of the Financial Intelligence Unit (FIU). Enactment of this draft law, however, is facing strong opposition, particularly from the legal and accounting associations. Increased awareness and consultation with the private sector would support the authorities’ efforts in this process.

Situation of money laundering and financing of terrorism

134. Greece, as most countries in the region, is vulnerable to ML and terrorist financing. Its geopolitical location, including its long coastal borders and many islands, makes it vulnerable to illegal traffic in human beings, illicit drugs, high-tax commodities, as well as smuggling of cash and monetary instruments. Its relatively large cash economy also encourages trading in the informal system.

135. Greek investigations have revealed the use of a wide array of financial institutions in ML operations including banks, investment firms, mutual funds, offshore companies, and bureaux de change. In most cases common money laundering schemes and instruments have been used involving domestic bank accounts, securities, and real estate. There have also been cases involving structured domestic and international transactions and the use of third parties. The use of government bonds for money laundering has also been observed.

136. Greece is perceived by the domestic authorities as a low risk country for terrorist financing. While the authorities have succeeded in dismantling two domestic terrorist organizations, no terrorist related assets or funds were confiscated in these cases. No assets of international terrorist groups or terrorists have been found in Greece and there appears to have been no systematic review of FT risks to date. Money remittance and currency exchange businesses are licensed but there are indications that some unlicensed bureau de change businesses exist raising the possibility of abuse for ML/FT purposes. No systematic review of the ML/FT risk has been conducted by the authorities to date which could confirm or dispel the existence of such unauthorized activities. Unauthorized alternative remittance systems have also been identified mainly involving cross-border cash transfers using tour buses raising the possibility of abuse for ML/FT purposes.

Overview of the financial sector and designated nonfinancial business and professions

137. AML supervision of banks and other financial institutions in Greece is not sufficiently risk-based and there is an urgent need to broaden and deepen the scope of AML supervision in key areas, including financial conglomerates. The Greek financial sector is dominated by banks, insurance, and securities companies, which comprise the principal ML/FT risk sectors in the financial system. The Bank of Greece (BoG) is responsible for the supervision of banks and other financial institutions (other than insurance and securities) but so far it has only conducted AML inspections of banks and bureaux de change. Money remitters were not subject to a licensing regime until 2003 and prior to this they were only required to submit statistical information on all their activities to the BoG. There are plans to extend its AML supervision to money remittance and other credit institutions under its supervision starting in the latter half of 2005, which will require significant enhancement in the number of staff and in AML/CFT training.

138. The Hellenic Capital Markets Commission (HCMC) is the lead regulator for securities firms and the stock exchanges. It has conducted very few AML inspections in the past year and there are no concrete plans to expand and strengthen its AML supervisory capacity and examination program. There has been no AML supervision of insurance companies and brokers. Furthermore, agents are not licensed or supervised. A new insurance supervisory body has been created but is not yet operational.

139. DNFBPs are not covered by the AML Law and hence, they are not required to conduct customer due diligence and report suspicious activity to the FIU. This constitutes a major gap in AML controls which should be partly addressed by draft new legislation being proposed. Financial institutions and DNFBPs are not subject to customer due diligence (CDD) measures for CFT.

Legal systems and related institutional measures

140. While money laundering is criminalized in Greece, the scope of the main ML offense is narrow and its prosecution in practice has proved difficult. Greek judicial practice interprets the AML Law 2331/1995 as requiring substantial material proof of a predicate offense to establish that the property involved in the ML offense is the proceeds of crime. This is typically established only upon conviction. This interpretation therefore, puts a relatively high burden of proof on prosecutors who focus mainly on the predicate offense. Most ML cases prosecuted so far were self-laundering cases. The mission recommended that authorities expand the coverage of the ML offense to all serious offenses and ensure that they include all the FATF “designated categories of predicate offenses.” In addition, the judicial authorities should consider a more flexible interpretation of the link between ML and the predicate offense to also enable prosecution of ML cases as autonomous offences.

141. The FT has been criminalized but it is not fully compliant with international standards. The FT was criminalized under Law 3251/2004 on the European Arrest Warrant, but its scope is limited to financing the “forming or joining” of a terrorist group. It does not cover the financing of individual terrorists or terrorist acts. In addition, while the offense does not require the actual commission of a terrorist act by the “terrorist group,” there must be some preparatory acts to give rise to the offense of “forming or joining a terrorist group.” This definition is not consistent with the FATF recommendations and relevant United Nations instruments. The FT should be an autonomous offense, whether or not a terrorist act has actually occurred, and whether or not funds were used to finance a particular act.

142. While financial institutions are required to file suspicious transaction reports (STRs), filings are often not timely and sometimes only filed regarding suspected ML in relation to a specific predicate offense under Article 1 of the AML Law. Emphasis should be placed on creating an enforceable obligation to file an STR with the FIU whenever a financial institution (FI) suspects that a transaction is connected to any criminal proceeds, irrespective of what the underlying offence might be.

143. The FIU (Article 7 Committee) has significant shortcomings in its current institutional structure and resources, and lacks the ability to adequately analyze the STRs it has received and to fulfill its role as a central coordinating agency. The FIU is made up of temporary representatives from eight agencies which should enable sharing of information between all the institutions represented. A unique feature of the FIU is that a representative of the private sector also sits on the committee, raising important conflict of interest issues that should be resolved. None of the committee members are full-time staff and the entire analytical process for STRs received is conducted by them. No other specialized full time analytical staff has been assigned to the FIU and there are only five administrative support staff assigned to it.

144. In the context of ML investigations, Law 2331/1995 does not provide for temporary conservation measures by a competent authority for property that may be subject to confiscation. Conservation orders must be issued by a court and may take some time to be issued. In order to avoid any risk of dissipation of proceeds during this process, Law 2331/1995 should provide a competent authority with the power to require the temporary freeze of such property. Furthermore, existing seizure provisions in the Penal Code should require a lower standard of evidence than the current criminal standard. Administrative sanctions should also apply to all legal persons that hold proceeds of crime generated from ML or a predicate offense and not just in cases where the legal entity is part of organized crime. The FIU may be the appropriate competent authority to issue these temporary conservation measures upon becoming more functional and operational.

145. As a rule, confiscation is conviction-based and is considered to be a secondary penalty, and it is not available against legal persons unless they form part of an organized criminal group. The general confiscation regime is governed by Article 76, paragraph 1 of the Penal Code while Law 2331/1995 creates a specific regime for ML cases. Article 2 (6) of this Law imposes confiscation on all property which “is the product of criminal activity or is acquired in any way from a product of such criminal activity or the property which is used, partly or in total, for criminal activity” (the proceeds of crime laundered or to be laundered). Criminal activity is, however, narrowly defined. Confiscation from legal persons is not possible although administrative fines may be applied to legal entities but, as mentioned above, they must be part of organized crime.

146. For purposes of judicial proceedings, bank secrecy provisions are in force in Greece and can only be lifted if sufficient evidence of criminal activity is produced before a magistrate, or a competent judicial council. The process can be lengthy and can impede international requests for assistance. Once bank secrecy has been lifted, information on a bank account can be accessed and funds may be frozen. The examining magistrate or the Judicial Council may proceed on an ex parte basis but the consequent order is served on both the accused and the financial institution in question pursuant to Article 5 (1) of the AML Law. Separately, the FIU and the BoG have access to such information for their own purposes.

Preventive measures—Financial institutions

147. The Greek authorities have taken important but limited steps to implement AML controls in the financial system, mainly in the banking and currency exchange sectors. The BoG has formed a specialized, albeit small, team of AML supervisors authorized to conduct onsite AML inspections of banks and other institutions. There are plans to extend AML inspections beyond banks and bureaux de change to money remittance firms which only came under the supervision of the BoG in the second half of 2004.

148. After the adoption of the proposed new AML/CFT law, important measures are still required to improve the AML/CFT supervisory framework for banks and other FIs under the supervision of the BoG. These are, inter alia, (i) develop and implement requirements for CFT measures, in coordination with the other supervisory bodies, the FIU, and other stakeholders; (ii) develop a more risk-based approach to AML/CFT supervision that addresses the key risks identified in the Greek financial system—this would require a systemic review of ML/FT risks in the financial and other economic sectors; (iii) expand the scope and depth of AML/CFT supervision that also focuses on policies and controls at the institutional level, including at the head offices of FIs, and not only at branch level; (iv) develop an integrated approach for AML/CFT supervision of financial groups, in coordination with the other relevant regulators, namely the HCMC and new insurance regulator; and (v) review and strengthen industry guidelines and typologies in collaboration with the FIU, regulators, and other stakeholders. Under these new approaches there will be a need to enhance the AML/CFT skills and resources of the BoG’s AML unit as well as for the other supervisory bodies.

149. Supervision of AML in the securities sector has only recently commenced and there is broad scope for improvement. The HCMC started on-site inspections for AML only in 2004—four inspections with AML elements—as part of its general prudential on-site program.16 As for the BoG, there is a need to risk focus its examination program for AML/CFT and to significantly expand the scope of its examination procedures. Closer collaboration with the BoG and insurance regulators will also be required for consolidated AML/CFT risk supervision of financial groups, a key feature of the Greek financial system.

150. Perhaps the most significant gap in AML/CFT controls in the financial sector is the absence of AML/CFT supervision in the insurance sector. In addition, insurance agents and brokers are not subject to the AML law and agents are neither licensed nor supervised. It is estimated that between 80–95 percent of insurance business is generated through agents including high risk areas such as life insurance and investment-linked policies. FIs also market bancassurance products and there is increasing integration of these services with the banking and mutual funds sectors.

151. Taken together, these weaknesses add up to a significant ML/FT vulnerability in the Greek financial system. This risk is heightened by the continuing expansion by some financial institutions into new markets in neighboring countries, even though these markets are considered by both the authorities and the private sector as presenting a higher degree of ML/FT risk. Going forward, the authorities should coordinate their efforts to improve AML and introduce CFT supervision of all relevant institutions, and develop common risk-based approaches across sectors, consistent with the continuing development of financial conglomerates. In addition, the AML and/or regulatory laws should be reviewed to provide all of the regulatory authorities with an explicit mandate to supervise and enforce AML/CFT compliance by FIs.

Preventive measures—Designated nonfinancial businesses and professions and nonprofit organizations

152. The Greek AML/CFT regime does not include DNFBPs and nonprofit organizations (NPOs). Draft amendments to the AML Law currently being considered, are expected to require all of these sectors to comply with international standards. The authorities have not conducted a review of the NPO sector to ascertain their vulnerability to ML/FT risk and the adequacy of controls.

153. Of particular importance is the need to develop a comprehensive regulatory and supervisory regime to minimize ML/FT abuse in the casino industry. Similar to the financial sector, there have been reports of at least one major Greek casino starting operations in a neighboring country which could increase the risk profile of this industry. Special attention also needs to be paid to the functions of lawyers and notaries in the formation and administration of offshore companies with offices in Greece. AML/CFT controls and enhanced transparency should also be considered with respect to the registration of these offshore companies as they present a particular challenge in the conduct of CDD on beneficial owners and controllers.

Legal persons and arrangements

154. The ability of nonlisted companies to issue bearer shares and the complicated and lengthy process to obtain information on shareholders, pose a constraint on CDD and AML/CFT controls generally. This could delay timely access by law enforcement and other competent authorities in the investigation of ML/FT crimes.

National and international cooperation

155. At a national level, policies have not been sufficiently established to provide the necessary mechanisms for cooperation between the FIU, law enforcement, supervisors, and other competent authorities. With its multi-agency representatives, the FIU does promote interagency cooperation among its members, though this is not sufficiently carried through to the agencies themselves. The authorities should put in place more effective mechanisms to enable all the relevant authorities to coordinate domestically, including the formulation of a comprehensive and coordinated national AML/CFT policy. Such a policy should be largely based on a risk assessment of the specific vulnerabilities and risks in the Greek system.

156. It is difficult to judge the timeliness and effectiveness of international cooperation provided by the Greek authorities due to the lack of data on incoming and outgoing mutual assistance requests. Mutual legal assistance is based on three types of instruments (i) bilateral mutual legal assistance treaties in force with 21 countries; (ii) multilateral conventions; and (iii) relevant provisions of Greek law, in particular Articles 457–461 of the Code of Criminal Procedure dealing with mutual legal assistance. Extradition is also governed by treaties and domestic law. While international cooperation has a sound legal basis, delays occur in practice.

Summary assessment against the financial action task force recommendations

157. Overall, the current framework in Greece is extensive but not yet sufficiently effective. The Table below summarizes recommended actions in areas related to the FATF 40+9 Recommendations.

Table 4.

Recommended Action Plan to Improve the Anti-Money Laundering and Combating the Financing of Terrorism System

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Authorities’ response to the assessment

158. The Greek Authorities would like to thank the IMF assessment team, for all the work put in producing this very comprehensive report that should prove very helpful in our continuous efforts to improve the AML/CFT system in Greece. The authorities believe that despite several weaknesses and shortcomings in the current AML/CFT system, significant progress has already been achieved and will continue in the near future.

159. As mentioned in the report, the Greek authorities have identified the major weaknesses of the system and have taken important steps to address them. The draft Law, which has already been introduced to the Greek Parliament, is expected to address a number of issues mentioned in the report and will undoubtedly provide the necessary framework for the authorities to move to a more risk based AML/CFT system.

160. A number of observations are in order:

  • The report points to the increased AML/CFT risks in the region. Being fully aware of this kind of risk, the Greek authorities would like to emphasize a) the adoption of strict rules-based procedures and mechanisms which admittedly need to be further improved and b) closer and continuous cooperation with neighboring Balkan countries at all AML/CFT levels.

  • Regarding the point on ‘… the use of a wide array of financial institutions in ML operations… “through a number of channels, the Greek authorities would like to draw attention to the fact that all financial institutions in Greece are actively confronting AML/CFT risks by applying effective monitoring procedures. This point reinforces, rather than refutes, the argument about the effectiveness of existing AML/CFT procedures in identifying ML cases in Greece. Moreover, it should be taken into account that a) due to adoption of tighter rules and regulations and b) due to continuous improvement of monitoring procedures in the Banking, Securities and Insurance sectors in Greece, money laundering operations gradually tend to swift to less supervised and monitored areas. This is an international trend pertaining not only to Greece and explicitly recognized also by FATF Typologies. Thus, the emphasis is now put also on the nonfinancial sector (real estate agents, lawyers, etc.), especially with regard to combating terrorism financing.

  • Furthermore an objection should be recorded regarding the report’s inaccurate statement that “…there has been no AML supervision of insurance companies and brokers. Furthermore, agents are not licensed or supervised.” The legal basis for Insurance Companies supervision is articles 2, 3, 3a, 6 etc. of Decree Law 400/1970. As regards the AML supervision of Insurance Companies, Law 2331/1995, and Ministerial Decision ref. K3/9563 of 28-11-1997 determine the framework for the AML supervision of Insurance Companies. In addition, the legal basis that establishes licensing and operations of brokers and agents is given by law 1569/85 (articles 3, 7, 10, 13, 15a). We should also emphasize that the Independent Supervisory Authority for the Insurance Sector has already been established by law 3229/04 (Gov. Gazette 38/10-2-04). The Presidential Decree, currently in Parliament’s Supreme Administrative Court, aims at materializing the law, otherwise to organize the new Independent Authority for which legal basis already exists.

  • Regarding the report’s observation that ‘… most ML cases prosecuted so far were self-laundering cases…’ it should be pointed out that the Draft Law currently at the Greek Parliament provides explicitly for the punishment of self-laundering activities, which is not the case in most FATF countries’ AML/CFT legislation so far. We would also like to underscore that under the provisions of the said Draft Law the definition of AML/CFT offences has been widened in scope including a) sixteen designated offences and b) any other serious offence (misdemeanor or felony) punishable by at least six months imprisonment, generating substantial proceeds. In this connection, the TF-related crimes mentioned on the report are included among the aforementioned sixteen designated offences, as well as terrorism and terrorist financing activities per se.

  • Regarding “indications” that some unlicensed bureaux de change and money remittance business continue to operate, we would like to point out that, in Greece, and provision of such services without being licensed is illegal. We do not think that companies operating in the tourist sector (hotels, etc), which are explicitly allowed, because of the prohibition in all other cases, to provide limited services, only to their customers and for very small amounts should be considered “unlicensed bureaux de change businesses,” as this is an international practice that applies to hotels. In addition, the exchange of large amounts of currency, not consistent with the customer’s business and level of activity, is an indication of suspected money laundering according to the authorities’ indicative list of suspicious transactions.

  • Regarding the licensing regime of money remitters, we would like to point out that such a regime became obligatory only in late 2001, with the issuance of the FATF Special Recommendations. The procedures for transposing such a requirement in the legal system does take sometime and therefore the relevant law was passed in May 2003. However in Greece even before these companies were brought under the licensing regime they were subject to a regime of close monitoring by the authorities, which also conducted on-site inspections to monitor their compliance with a set of specific requirements. The requirements consisted not only of the obligations of remittance firms to provide the BoG with statistics and data on foreign exchange transactions but, most importantly, to remit customers’ funds through credit institutions, which were subject to AML rules and applied them also on money remittance firms’ customers (therefore, reporting cases of suspicious transactions to the Competent Body—Greek FIU at that time).

  • Regarding the on site inspections of money remitters, although starting on site examinations immediately after the licensing of a business is not consistent with international practice, we acknowledge the issue and we are pleased to inform you that such examinations will be completed by the end of October.

  • On the issue of reporting of transactions only regarding suspected ML in relation to a specific predicate offence we would like to note that the requirement and the widespread practice is that a transaction is reported when “there are any doubts about the legitimate origin of the funds involved.” No linkage to a specific crime is required and generally no predicate offence is mentioned in the STR to the Greek FIU.

  • Concerning the measures suggested that BoG should take; some of them have already been taken (or initiated). In particular, the AML unit at the BoG has been strengthened with new employees with increased qualifications and examinations, focusing on policies and controls have already started and respective guidelines are being drafted.

  • Regarding the number of AML inspections undertaken by the Hellenic Capital Market Commission (HCMC), we would like to point out that, as already mentioned in our comments sent to the IMF team in June, since the establishment of the HCMC (1995) all, on site, full scope audits carried out by the HCMC inspectors includes an AML component. Therefore, it is considered inaccurate to state that supervision of AML in the securities sector has only recently commenced. Moreover, based on the comments made by the IMF team to the HCMC, the HCMC has developed special AML audit programs that became effective in July 2005 and up to date three special AML audits have already been carried out.

  • Furthermore the HCMC can and has imposed sanctions based on HCMC’s Rule 108 and the Codes of Conduct for Investment Firms and Institutional Investors (as previously notified). We also note for the record that any breaches of Law 2331/95 and HCMC Rule 108 may additionally lead to the revocation of license of supervised entities.

  • During the AML assessment and based on exchange of views between the IMF team and the HCMC, we expected that the securities sector should have been included among the sectors that took important steps to implement AML controls in the financial system.

APPENDIX TABLES

Table 16.

Greece: Financial Soundness Indicators for the Banking Sector, 1998–2004

(In percent, unless otherwise indicated)

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Source: Bank of Greece.

On a consolidated basis; market risk is included.

Or in other markets that are most relevant to bank liquidity, such as domestic foreign exchange markets.

Approximate.

On a consolidated basis.