“We need more Europe”

Interview with Christina Papaconstantinou, Member of the Supervisory Board of the ECB and Deputy Governor of the Bank of Greece, Supervision Newsletter

15 May 2024

You took part in the Troika negotiations and saw at first hand the crippling effects of the great financial crisis. From a supervisor’s perspective, what is the key to preventing another large-scale crisis?

The great financial crisis, the euro area sovereign debt crisis and the deep economic recession that ensued in Greece resulted in major challenges for the Greek banking sector. These included a sharp increase in non-performing loans, a bank run and loss of market access, and the eventual imposition of a bank holiday and temporary capital controls. Many lessons have been learned on how to prevent another crisis on this scale in the future. Those that stand out from a supervisor’s perspective are (i) the need to have an effective crisis management framework in place; (ii) the importance of completing the banking union by establishing its third pillar, the European deposit insurance scheme; and (iii) the significance of proactive and effective microprudential and macroprudential supervision. The common denominator is that we need more Europe. This means pushing forward with the necessary reforms during good times so as to take a proactive approach in the pursuit of our common goals. The Single Supervisory Mechanism (SSM) is an outstanding example of what we can achieve when we take bold steps in this direction.

Greece as an issuer has finally regained its investment grade status, thanks in part to banks reducing their non-performing loans. How has the Greek banking sector evolved over the past 15 years?

The fundamentals of the Greek banking sector have improved substantially over the past 15 years. The acute economic crisis in Greece took a toll on the asset quality of Greek lenders. At the peak of the crisis, about half of the loans in banks’ portfolios were non-performing. Banks were relying on emergency liquidity assistance as they faced a declining stock of deposits and impaired access to the markets. They eventually managed to offload their legacy assets but recorded enormous losses and had to undergo several rounds of recapitalisation. In addition, the structure of the Greek banking sector changed completely, as a number of banks had to exit the market.

I am pleased to say that the Greek banking sector has been a successful turnaround story. Today, Greek banks have solid financial fundamentals across all business segments and risk areas, and they can look to the future with optimism thanks to positive economic growth prospects, favourable public debt characteristics and the reinstatement of investment grade status. However, there is no room for complacency, since challenges remain given the rapidly changing economic and geopolitical landscape.

Earlier this year, shareholders were eager to learn whether Greek banks would finally start paying out dividends again. What will drive the Supervisory Board’s final decision?

Greek systemic banks are preparing to resume dividend distributions in 2024, more than a decade after the onset of the Greek sovereign debt crisis. Since the launch of the SSM in 2014, Greek banks have been restricted from paying out dividends. This is a qualitative requirement under the Supervisory Review and Evaluation Process to ensure that banks maintain sufficient capital to absorb the losses from the non-performing loan (NPL) clean-up. The decision on distributions in 2024 is planned for June. It is likely to take into consideration the committed and sustained efforts by Greek banks to reduce their large stock of NPLs. Apart from the balance sheet clean-up, Greek banks have also managed to replenish their capital buffers through higher profitability and management actions, including share capital increases and synthetic securitisations. In addition, the Hellenic Financial Stability Fund successfully divested its entire stake in three out of the four significant banks in late 2023 and early 2024. It therefore seems that the time has come to enable Greek banks to pay out part of their returns to shareholders once again, both to reward existing investors and to attract more long-term ones.

The Greek banking market is quite concentrated, but fintech companies and non-banking institutions are gradually bringing increased competition. Do you think the position of banks will be challenged, and if so what impact would this have on the overall risk situation?

It is true that the Greek banking sector is highly concentrated, with the four significant banks holding 96% of total banking assets. In addition, the Greek financial system is bank-centric, with the banking industry accounting for 86% of total assets in the wider financial sector. Insurance companies, mutual funds and investment firms, as well as non-bank financial institutions and NPL servicers, only have a small share of total financial sector assets. Against this backdrop, a potential increase in the activity of fintechs and other non-bank financial institutions would be welcome, as it would enhance the product offering and provide alternative funding sources as well as investment opportunities. That said, we would not expect the position of banks to be significantly affected, given their incumbent status and competitive advantage, especially in deposit gathering (as low-cost current and sight deposits represent almost 75% of the deposit base). It is therefore highly unlikely that growth in fintech activity would pose any systemic risk.

European loan demand has shrunk, yet Greek banks want to substantially expand their credit portfolios. Do you think they will meet their ambitious targets?

Bank credit growth in Greece has been positive over the past few years. It has been driven by an increase in lending to the corporate sector, supported by strong economic performance. Nevertheless, after reaching a peak of 12.3% in September 2022, corporate bank credit expansion eased considerably. This was due to higher interest rates and weakening economic growth, both of which resulted in lower loan demand. More recently, though, in the last four months of 2023, the annual growth rate of corporate loans has picked up again. Meanwhile, bank lending to households continues to contract, reflecting shrinking housing loans.

It is true that all Greek banks have set ambitious targets for credit growth. During the next three years, credit provision to the economy is expected to be backed by the funds available through the loan part of the EU Recovery and Resilience Facility and to be supported by the implementation of Greece’s National Recovery and Resilience Plan, as well as by favourable growth prospects. That said, stronger growth in lending to the retail and SME segments is critical for meeting these ambitious targets.

This lending boost will require capital, but banks also have to meet their minimum requirements for own funds and eligible liabilities (MREL) by the end of 2025. Are they on track?

The capital adequacy of Greek significant institutions has improved substantially over the past few years, driven by strong profitability, a clean-up of balance sheets and other capital accretive actions. Therefore, Greek significant banks have the necessary capital buffers to meet their credit growth goals.

In addition, they are making good progress towards meeting the MREL targets for the end of 2025, having so far met their intermediate targets. The cost of issuing MREL instruments is still higher than for some EU peers. However, the recent upgrade of the Greek sovereign credit rating to investment grade has enabled banks to raise funds from the market at a lower cost and has expanded the pool of investors. The banks’ efforts have also been supported by strong core profitability, which has resulted in double-digit returns on equity in 2022 and 2023. Looking ahead, I believe that the target of full compliance with MREL requirements is feasible even if the banks significantly expand their loan portfolios.

How can national supervisors – and the Bank of Greece specifically – help to achieve a more integrated European banking sector?

The establishment of the SSM has been the most decisive step towards further integration in the EU since the introduction of the euro. Over the past ten years, we have accomplished a lot and have managed to deliver top-quality supervision, using common tools and methodologies and a single framework. We have weathered crises such as the pandemic and successfully managed to preserve financial stability. Integration requires a joint, ongoing effort. In this respect, national competent authorities (NCAs) have played a significant role through their participation in the Joint Supervisory Teams and in all initiatives that foster cooperation and a “one team” culture, such as networks, working groups, training activities and study visits. Through collaboration and enhanced dialogue, we will build a culture of mutual trust that relies on recognising each other’s strengths and credibility. For the Bank of Greece, playing our part in achieving further integration is a top priority. That is why we have significantly increased our headcount since the SSM was set up and why we are actively involved in all joint initiatives. I would say that NCAs are in a unique position to contribute to the joint effort thanks to their supervisory experience and deep knowledge of domestic systems. For example, the experience that Greek supervisors have accumulated from dealing with an acute banking crisis and from resolving legacy issues is an important asset in our common pool of knowledge and expertise.