Greece’s battered banks will undergo accelerated tests to uncover their capital shortfalls as authorities race to recapitalise the lenders by the end of the year and avoid penalising large depositors.
This scrutiny by European and Greek regulators will be completed after the summer, a banking source told Reuters, with the aim of plugging the capital holes before legislation comes into force in January that can require bigger depositors to contribute to the cost of rescuing a failing bank.
Greek banks already underwent stress tests and asset quality reviews (AQRs) last year as part of a continent-wide exercise that took nine months.
But since then the state of the four main lenders – National Bank, Piraeus, Eurobank and Alpha – has worsened dramatically along with the national economy, meaning they need their third recapitalisation since Greece plunged into crisis in 2010.
European Union authorities must find out how much worse things have got before working out the size of the required recapitalisation, to be made by either the European or Greek bailout funds.
This means the stress tests, which simulate how a bank can cope with a crisis, and the AQRs, which assess the value of its assets, have to be re-run.
“The comprehensive assessment will be completed after the summer,” the source said, declining to be named. “It will be a faster process compared to last year’s health checks.”
Preparations are under way at the European Central Bank on the review and the assumptions that will be used. The yardsticks on how much capital the banks should hold under normal and crisis conditions may not be changed from last year’s exercise.
“A standard process will be followed, assessing the capital gap for each bank. The minimum core equity capital ratio that will be required may be 8 percent under a baseline scenario and 5.5 percent under an adverse scenario, as in last year’s stress test. But this has not been finalised yet,” the source said.
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.
“The million dollar question is what the check up will show, how big the capital shortfall is,” another source close to the issue told Reuters, declining to be named.
According to figures from Greece’s international creditors, the four banks could need €10 billion to €25 billion to restore their capital base.
Worries that such a massive boost will severely dilute the stakes of existing shareholders pummelled the banks’ stock prices when the Athens market reopened on Monday after a five week closure. Over three days, they lost 63 percent of their market value before a rebound began.
Judged by European Banking Authority standards, banks’ “non-performing exposures” – which include loans in arrears for more than 90 days and restructured credit unlikely to be repaid – hit 40% of their portfolios last year.
Greece’s bank rescue fund injected 25 billion euros into the four in 2013 in exchange for shares, and last year they raised a further 8 billion from international investors.
The Hellenic Financial Stability Fund (HFSF) now has majority stakes in all the banks except Eurobank. It and private shareholders such as U.S. billionaire investor Wilbur Ross, who bought a stake in Eurobank, are nursing huge losses.
Since January, when the leftist-led government came to power promising to roll back austerity policies, the banks have lost 75% or €14.5 billion of their market value.
Ross, who invests in distressed assets, said earlier this week he has not lost heart. “Our immediate concern is whether the AQR and the stress test are sensible and do not go overboard with negativity because of the recent tumult,” he told CNN, adding he might be interested in joining a capital-raising rights issue for existing shareholders.
“As long as the treatment of the institutions is fair and not based on wild assumptions, then in principle many of us would be prepared to participate in a rights offering.”
Race against time
Last month, 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.
“There will have to be a race against time to wrap up the recapitalisation by the end of this year. If it is done in 2016, when the BRRD directive goes into full effect, there could be a risk for large depositors,” the banking source said. “Completing it this year effectively avoids a bail-in of depositors.”
Unsecured depositors with more than 100,000 euros in their accounts will be spared if the recapitalisation goes through this year. However, shareholders will be hit along with other investors holding junior debt before either the European Stability Mechanism or the HFSF injects the new money.
Finance Minister Euclid Tsakalotos said this week the international lenders also wanted to complete the recapitalisation by the end of the year.
ECB Governing Council member Christian Noyer has said he opposes asking major depositors to contribute to the recapitalisation – as was the case with the bailout of banks in Cyprus in 2013 – since most of them in Greece are small and medium-sized enterprises.
Bankers say depositors in Greece most fear Cypriot-style “haircuts”, along with a return to the drachma national currency. But once the recapitalisation is complete and the euro zone had agreed a new bailout for the Greek government, depositors will be reassured and capital controls can be lifted.
“For as long as banks remain undercapitalised, capital controls cannot be lifted and this is a main issue for depositors,” the banking source said. “The sooner this ends, the better.”