Interview with Ta Nea
Interview with Danièle Nouy, Chair of the Supervisory Board of the European Central Bank (ECB),
published on 4 November 2015, conducted by Eirini Chrysolora
The ECB has just announced the results of the comprehensive assessment of the four significant Greek banks. Why are the Greek banks again in need of recapitalisation, just one year after the previous injection of €8.3 billion and two years after the initial one of €28 billion? What has changed since last year’s exercise?
Well, since last year’s exercise, the results of which were disclosed in October 2014, we have witnessed a significant deterioration in the outlook for the Greek economy. First, the Greek economy, which had returned to positive growth in 2014, is contracting again. So, there is a significant deviation from the predictions regarding the economic environment that were embedded in the previous exercise. Second, the imposition of capital controls last summer by the Greek authorities has had a negative impact on the overall situation of the banks. Finally, both the decrease in deposits and the banks’ need to rely once more on emergency liquidity assistance (ELA) are also having an adverse effect on their balance sheets. In line with these adverse developments and the specific circumstances of the Greek market, selected prudential adjustments had to be made as a result of this year’s exercise in order to reflect the higher risks the banks were facing; hence the need to inject more funds into them.
What are the next important steps? Do you think there is enough time for the recapitalisation to be completed by the end of 2015?
We expect the banks to come up with their capital plans by this Friday in which they propose how they want to address the shortfalls identified by the comprehensive assessment. Once these plans are approved, banks may start the capital raising process. I do believe that there is enough time to recapitalise the banks by the end of the year in line with the requirements of Greece’s third economic adjustment programme. Now, as far as we, as supervisors, are concerned, it is important that, under the third bailout programme for Greece, there is a backstop of €25 billion that significantly exceeds the €14.4 billion shortfall identified in the exercise.
How safe are the deposits in Greek banks? Can you rule out the chance of a bail-in?
Obviously, once the banks have been recapitalised, they will be in a much better position to withstand potential adverse macroeconomic shocks. So, the recapitalisation will help restore confidence in the banking system. Moreover, in line with the implementation of the Bank Recovery and Resolution Directive (BRRD) in 2015, and as was declared in the Eurogroup statement of 14 August, a bail-in of depositors is excluded, which will support the prospects for recovery of the Greek economy. This is also why the recapitalisation of the Greek banks has to be concluded before the end of the year, as the full implementation of the BRRD in 2016 will be more rigorous. So, it is important that all the necessary steps foreseen in the programme for Greece are taken on time.
Is there a risk that another recapitalisation will be needed soon? What does it depend on?
This exercise was very rigorous, and the adverse scenario used was quite conservative. So, I think that if there are no uncertainties and further deviations from the current economic scenarios, and if the adjustment programme is implemented in a credible manner, there will be no need for future recapitalisation. The implementation of other measures foreseen in the Memorandum of Understanding that are aimed at improving banks’ viability, in particular the effective management of the non-performing exposures and bank governance, will also play a key role.
After the recapitalisation, do you expect that Greek banks will be in a position to start lending capital to businesses in order to support growth?
The job of banks is to provide credit to the economy. But this is based on three pillars: solid solvency, strong liquidity and a proper framework for the management of non-performing loans. The comprehensive assessment and the recapitalisation process are aimed precisely at placing Greek banks in a much stronger position from a solvency and liquidity perspective. But even in that situation, banks will not be eager to grant loans if they are not certain that they will have the means to recover them. Thus, it is also important to take measures that will improve the payment culture and to ensure that the right disincentives are in place against strategic defaulters. In other words, it is important to provide protection to those who really need it, but the necessary conditions must be in place to deter free riders. For example, a legal framework that protects too high a percentage of borrowers can clearly be exploited by those who want to take advantage of the system. Ultimately, it is the economy as a whole and thus every individual Greek citizen that foots the bill.
Greek banks now depend on the relatively expensive financing of ELA. When do you expect this to end?
Indeed, reliance on ELA has a negative impact on the banks’ balance sheets and limits their ability to provide credit to the economy, as ELA is only meant to cover temporary liquidity needs. But we have to take one step at a time. First, confidence must be restored in order for deposits to return to the banks and for banks to regain access to international financial markets. This is the purpose of the bank recapitalisation. However, this is not the only prerequisite. As I described earlier, more action is needed. The return of deposits and of capital market funding will be delayed if people and investors do not have confidence in the prospects of the economy. The implementation of reforms is a prerequisite in this regard.
With regard to another issue that is important for growth, when do you expect the capital controls to be lifted?
In my view, the sooner they are lifted, the better. Capital controls create distortions in the economy and the banking sector, and also limit the freedom of citizens. But the decision lies with the Greek authorities, and they have to be very cautious. They will have to determine when confidence has been restored in order to proceed with the relaxation and the lifting of capital controls.
Do you envisage that private investors will fully cover the capital needs under the baseline scenario?
The conditions are in place, but let us first wait for the submission of the capital plans and the launch of the private capital raising process.
Will there be changes in the banks’ management boards?
As long as public funds are used to recapitalise the banks, it is very important for the State to be able to recoup those funds at some point in the future via privatisation. It is therefore crucial to ensure professional and efficient governance standards in the Greek banking sector. The law voted in last week is a step in the right direction.