Greek banks must find up to €14.4bn after ECB stress test

Closed bank, Greece.

Shuttered bank, Athens. [Shutterstock]

Four major Greek banks must find up to €14.4 billion to survive potential economic shocks, the European Central Bank said, releasing the results of an in-depth financial health check.

Weakened after years of recession, Greece’s banks took a further battering this year when the government pushed the country to the brink of a euro exit in a standoff with Berlin and Brussels over the terms of Greece’s international bailout.

While less than anticipated under the new aid package ? Greece’s third since 2010 ? the big four banks now have until Friday to explain how they will plug the capital hole on their balance sheets.

Greece’s Alpha Bank, Eurobank, the National Bank of Greece and Piraeus Bank were all submitted to a health check by the ECB known as “comprehensive assessment”.

The health check comprises an asset quality review and a forward-looking stress test aimed at assessing” the specific recapitalisation needs of the individual banks” under Greece’s current economic adjustment programme.

“Overall, the stress test identified a capital shortfall across the four participating banks of €4.4 billion, under the baseline scenario, and €14.4 billion under the adverse scenario,” the ECB said.

That is less than the €25 billion earmarked for the recapitalisation of the four major banks in the €86 billion bailout package agreed between Greece and its creditors this summer.

Piraeus was the weakest, with an anticipated shortfall of nearly five billion euros in an adverse scenario.

The banks have until 6 November to submit plans showing how they plan to cover their shortfalls, as part of a recapitalisation process to be completed before the end of the year.

Raising fresh capital would “result in the creation of prudential buffers at the four Greek banks, which will improve the resilience of their balance sheets and their capacity to withstand (a) potential adverse macroeconomic shock,” the ECB added.

Recapitalisation begins

Any capital increase would be the third for Greece’s banks since the country got its first international bailout in 2010, and come ahead of new more stringent rules for European banks come into force in January.

On Friday (30 October), the Greek government submitted draft legislation to parliament paving the way for the recapitalisation process to begin on Monday.

Finance Minister Euclid Tsakalotos on Saturday (31 October) praised the results of the stress tests and said he was “optimistic” over the process.

An ECB official said in a conference call: “Private investors’ contributions are expected to play a significant role in the capital-raising process by means of taking common shares.”

But if the private sector response is not sufficient, “the banks will enter into resolution,” the Greek finance ministry said earlier.

Analysts say Piraeus is the most exposed to bad loans because it has been a top lender to small and medium-sized Greek businesses that have particularly suffered under years of recession.

The bank on Saturday said it took bad loan provisions of €2.121 billion in the January-to-September period, down from €3.197 billion in the same period last year.

It reported a net loss of €635 million in the period, down 61% from last year.

The National Bank of Greece, meanwhile, reported a net loss of €1.614 billion for the second quarter, with provisions for bad loans in Greece soaring to €2.3 billion from €323 million in the first quarter.

Eurobank noted in a press release that it was ranked “as the Greek bank with the lowest, and fully manageable, capital needs under the… adverse scenario (reflecting) the soundness of the strategy we have been consistently implementing”.

Athens is set to receive up to €25 billion to recapitalise its banks under an €86-billion bailout deal with international creditors.

The European Commission warned Athens of a possible haircut in Greek deposits in the event that the first bailout review was not completed this year. It said the recapitalisation of Greek banks should take place after the first review of the bailout deal, and no later than 15 November.

>> Read: Commission leaves door open for Greek bail-in

Since January, when the leftist-led government of Alexis Tsipras came to power promising to roll back austerity policies, four major Greek banks have lost 75% of their market value, or €14.5 billion.

The four are Greece's Alpha Bank, Eurobank, the National Bank of Greece and Piraeus Bank.

Greece imposed capital controls in June to slow massive withdrawals from the banks, but these have accelerated the recession that the economy has sunk back into. This in turn has sent the rates of "impaired" loans at the banks soaring.

Greece's bank rescue fund injected €25 billion into the four in 2013 in exchange for shares, and last year they raised a further €8 billion from international investors.

In July, the Greek parliament adopted the EU's Bank Recovery and Resolution Directive (BRRD) which spells how authorities can deal with failing banks. This includes "bail-ins" under which depositors can be forced to contribute to a rescue so the burden does not fall on taxpayers, as was the case in the bailouts of the 2008-2009 crisis.

>> Read: Greek banks reopen, Merkel urges swift bailout talks

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