This Selected Issues paper provides updates on Greece’s financial stability framework. The paper highlights that the Bank of Greece (BoG) has strengthened the financial stability framework over recent years. In addition to the liquidity provided by the euro system through its regular refinancing operations and standing facilities, the BoG can provide emergency liquidity assistance (ELA) to financial institutions. In response to the global financial crisis, the authorities have assisted bank capital and funding. A manual has been developed to monitor financial stability and spell out contingency plans for the management of crises.

Abstract

This Selected Issues paper provides updates on Greece’s financial stability framework. The paper highlights that the Bank of Greece (BoG) has strengthened the financial stability framework over recent years. In addition to the liquidity provided by the euro system through its regular refinancing operations and standing facilities, the BoG can provide emergency liquidity assistance (ELA) to financial institutions. In response to the global financial crisis, the authorities have assisted bank capital and funding. A manual has been developed to monitor financial stability and spell out contingency plans for the management of crises.

I. Updates on Greece’s Financial Stability Framework1

The Bank of Greece (BoG) has strengthened the financial stability framework over recent years. This chapter summarizes improvements in two areas of particular interest in the current conjuncture: (1) the safety net framework; and (2) cross-border coordination.

A. Safety Net Framework

1. The safety net system provides a large degree of flexibility. It comprises three pillars: the liquidity and lender of last resort facilities, a crisis management and bank resolution framework, and a deposit insurance scheme.

Liquidity and lender of last resort facilities

2. In addition to the liquidity provided by the Eurosystem through its regular refinancing operations and standing facilities, the BoG can provide emergency liquidity assistance (ELA) to financial institutions.2 In accordance with the rules set by the ECB Governing Council, the general council of the BoG can decide to grant ELA to credit institutions on the recommendation of the Banking and Credit Committee. Banks need to provide adequate collateral. The BoG can authorize a broader range of collateral than that used for standard monetary operations—in theory any asset, including loans.

3. In response to the global financial crisis, the authorities have assisted bank capital and funding. A €28 billion package was introduced in November 2008, providing up to €5 billion in capital in the form of 5-year preference shares, and up to €23 billion in loanable funds. The facilities will be active until end-2009. The liquidity component includes: (1) state guarantees for up to €15 billion of new loans with a maturity up to 3 years against the payment of a commission (with or without collateral); and (2) lending to banks of special zero-coupon bonds of the Greek state up to €8 billion and a total duration of up to 3 years, against the payment of a fee and sufficient collateral (Table 1). The BoG administers the collateral pledged to the state in the context of these measures.

Table 1.

Eligible Collateral for the Bank Support Package

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Source: Ministry of Finance.

Crisis management and bank resolution framework

4. A Financial Stability Committee (FSC) was established in 2008, replacing the Crisis Management Committee. In addition to serving as the crisis management team, the new committee holds regular meetings to monitor financial stability. Members of the Committee are the governor, the two deputy governors, a member of the Monetary Policy Council, a governor’s consultant, and four directors of the BoG.

5. A manual has been developed to monitor financial stability and spell out contingency plans for the management of crises (Box 1). The FSC is also implementing internal procedures for identifying signs of deterioration and providing timely information for the management of crises. In line with the provisions of the Multilateral MoU of June 20083 and ECB guidelines, particular attention has been paid to the assessment of the systemic implications of a crisis (heat map). An exercise was carried out in September 2008 in order to identify issues of interdepartmental cooperation and data availability.

6. Bankruptcy procedures have been reformed. A new Bankruptcy Code was introduced in 2007 stipulating the bankruptcy and receivership arrangements for all legal persons which pursue an economic purpose, including banks. It aims at: (1) maximizing creditors’ assets; (2) balancing the settlement of outstanding payments and the reorganization of the creditor’s business; (3) equal treatment of equal creditors; (4) prompt and effective procedures and follow-up; and (5) preventing bankruptcy and premature dismantling of creditors’ assets. The BoG is the competent authority to decide on winding up proceedings in case of a credit institution’s authorization withdrawal.

Deposit insurance scheme

7. The coverage for deposits has been increased. In November 2008 the maximum coverage was increased to €100,000 per person per bank aimed at improving depositor protection and maintaining confidence in the financial safety net.4 By the same legal provision, the banks’ contributions to the Deposit Guarantee Fund were raised to ensure its financial soundness. Although the payout period is still long (three months with the possibility of an extension up to nine months in total), a draft law—transposing Directive 2009/14/EU—will be submitted to Parliament shortly reducing the payout period to twenty days with an extension for ten more working days under exceptional circumstances.5 The draft law also reduces the period needed from the competent authorities to decide on triggering the deposit guarantee scheme from 21 days to 5 working days.

Crisis Management Procedure

The governor of the BoG convokes the FSC: (1) when the parameters used for crisis prevention exceed defined limits; or (2) when it is deemed necessary to assess the situation and examine the possibility it may evolve into a crisis. Departments collect additional information to evaluate the situation and assess the implications of the crisis. This information is conveyed to any authority that is expected to take part in the resolution of the crisis. Two different approaches are followed depending on whether the crisis is of a domestic or a cross-border nature.

1. Domestic crisis. The FSC makes proposals on measures for the resolution of the crisis (with the lowest possible cost) to the competent decision-making organs.

  • Liquidity. In case of liquidity shortages, the Committee decides on measures and whether the appointment of a commissioner is necessary. To the extent that liquidity can no longer be drawn from the Eurosystem owing to the lack of eligible collateral, ELA may be provided at a penalty rate in accordance with the ECB Governing Council rules (e.g., prior approval or ex-post information depending on the amount).

  • Solvency. To address capital problems the first approach is to look for a market solution. If the crisis is of a systemic nature the National Financial Stability Committee 1/ is activated and communication with the Ministry of Finance and other sectoral supervisors is established. If the crisis concerns only one institution without systemic implications its resolution is the sole responsibility of the BoG.

2. Cross-border crisis. In case of a crisis in a banking group with cross border presence, the authority responsible for consolidated supervision—which acts as a coordinator—is informed. If BoG is recognized as coordinator, the governor of BoG takes initiatives to contain the implications of the crisis in cooperation, if provided for, with other competent authorities and market participants. During a general liquidity crisis, the ECB may contribute to an orderly functioning of the money market through its liquidity operations, based on operational procedures agreed at the Eurosystem level. Furthermore, the BoG may provide—temporarily and against collateral—ELA to illiquid but solvent institutions.

1/ The National Financial Stability Committee comprises the Ministry of Finance and the three supervisory authorities of Greece (i.e. Bank of Greece, Private Insurance Supervisory Committee, and the Capital Markets Commission).

8. Information on deposits has improved. The banks have developed new customer-oriented systems that allow them to provide the DGF with immediate information about the amount of insured deposits.

B. Cross-Border Coordination

9. The BoG has a long standing tradition of close cooperation with counterparts in Southeastern Europe (SEE). At the early stages of Greek banks’ expansion into SEE, and because none of the SEE countries was an EU member, there was a need to establish a framework for the cooperation among supervisory authorities. In this context, the BoG signed bilateral MoUs with the supervisory authorities of Albania (1999), Serbia (2002), Bulgaria (2002), Romania (2003), Cyprus (2004), and Turkey (2005) that set the basic elements of home-host supervision responsibilities. In addition, a MoU, in the form of letters’ exchange, was completed with the Central Bank of FYROM. These MoUs were based on the guidelines and practices introduced by the Basel Committee on Banking Supervision. The main purpose of these agreements was to facilitate supervision on an ongoing basis and to allow cross-border on-site examinations.

10. BoG has recently taken a series of initiatives to further enhance this cooperation:

  • SEE Multilateral MoU. In 2007, on the initiative of the BoG, a multilateral MoU was signed between the Central Banks of Albania, Serbia, FYROM, Bulgaria, Romania, Cyprus and Greece for the cooperation in the field of banking supervision. In 2008, the authorities of Bosnia Herzegovina and Montenegro also joined the MoU. The aim of this MoU is to enhance the effectiveness of supervision of the large banking groups operating in the region and promote convergence of supervisory practices. The MoU covers, among others, issues related to information exchange, model validation, and cooperation of the parties involved in the management of crises with cross border implications. Once or twice a year, a member country hosts a Governors and Heads of Banking Supervision meeting that tackles specific issues within the MoU. This new framework has contributed to setting up communication networks among the authorities and to establishing working groups to explore the potential for the convergence of practices. A sub-working group on stress testing has also been established. The outcome of this sub-working group will be the creation of stress scenarios designed by each local authority and the performance of a stress testing exercise for whole banking groups including subsidiaries.

  • Joint inspections. Local authorities have participated in the on-site controls performed by BoG in SEE. With or without the active participation of host supervisors in the on-site inspections, BoG has a continuous consultation and exchange of information with the local supervisory authority and extensive exchange of views on the outcome of the reviews.

  • Bilateral meetings with other central banks and supervisors. In order to address the impact from the recent crisis in a more effective manner, the governor of the BoG has initiated bilateral meetings with the governors of the national central banks and the heads of banking supervision in SEE. Top executives of Greek banking groups with presence in the specific country are invited separately in order to exchange views on the performance of the group as a whole and the specific subsidiary. The purpose of these meetings is to assess the macroeconomic environment of the region and its implications on financial stability and the performance of Greek banking groups. The results of the stress tests carried out by national authorities were also discussed to assess the resilience of Greek banks’ subsidiaries and to agree on measures to strengthen the banks’ position. In addition there was an exchange of information about the measures taken by supervisory authorities and the banks’ policies to address the financial crisis (e.g. new business plans, focus on deposits, etc).

  • Vienna banking cooperation initiative. BoG has initiated meetings with the heads of Greek commercial banks to present the objectives of the Vienna Initiative and to encourage the Greek banks to maintain the current level of funding from parent institutions and credit exposures, and to inject capital into subsidiaries if necessary.

  • Supervisory colleges. On March 6, 2009, BoG hosted a supervisory college with the participation of all host supervisors who are responsible for the supervision of the subsidiaries and/or branches of the National Bank of Greece (NBG) group. Although colleges have been developed for the cooperation of EU member states, third countries were invited as well. Another two colleges (one for Alpha Bank and one for EFG Eurobank Ergasias Bank) will be established by end-2009.

1

Prepared by Marialuz Moreno Badia.

2

Within the Eurosystem, in addition to regular open market operations, there are two standing facilities, implemented in a decentralized manner by the national central banks (NCBs), available to eligible counterparties on their own initiative: (1) the marginal lending facility to obtain overnight liquidity from the NCBs against eligible collateral; and (2) the deposit facility to make overnight deposits with the NCBs.

3

Multilateral MoU on cooperation between the Financial Supervisory Authorities, Central Banks, and Finance Ministries of the European Union on Cross Border Financial Crisis Situations.

4

In February 2009, the protection provided by the Deposit Guarantee Fund (DGF) to bank customers was extended to claims generated by the provision of investment services. In particular, until the adoption of this law, only banks which were members of the Athens Stock Exchange were obliged to participate in an investor insurance scheme. This extension of the coverage is in line with the provisions of Law 3606/2007 (implementing Directive 2004/39/EC), which stipulated that in order for banks and investment firms to provide investment services they should participate in an investor’s scheme. The investor protection scheme will cover up to the amount of €30,000 per investor.

5

Under this law, the deposit guarantee schemes should perform regular tests of their systems and, if appropriate, they are informed in the event that the competent authorities detect problems in a credit institution that are likely to trigger deposit-guarantee schemes.