Interview with Capital.gr

Interview with Elizabeth McCaul, Member of the Supervisory Board of the ECB, conducted by Vasso Angeletou

28 December 2023

What is your assessment of the progress made by the Greek banking sector over the last decade?

The progress made by the four Greek banks we directly supervise has been remarkable and this should not be looked at in isolation from the positive economic developments that have occurred in the country itself over the past few years. This year, Greece’s credit rating was raised to investment grade by three major ratings agencies. This is also positive for banks’ ratings. At the same time, the asset quality of Greek banks has been improving, as evidenced by the drastic decline in the non-performing loans (NPL) ratio. Similarly, banks have robust liquidity positions since, owing to their traditional business models, they are largely funded by deposits. Profitability has also been improving thanks to a supportive interest rate environment and the substantial cost cutting that has taken place over the last few years. But let me stress that asset quality indicators to date may not be capturing in full the effect of recent changes in lending conditions. We have observed some tentative signals of deteriorating conditions, including through changes in the staging of loans, and this is consistent with expectations of the potential for higher NPL inflows in 2023.

The ECB recently announced the results of the 2023 Supervisory Review and Evaluation Process (SREP). What are the main takeaways for Greek banks? Is there enough “capital space” for them to distribute a portion of their earnings to shareholders after 16 years of zero dividends? And if so, how much do they have available to them?

The ECB recognises the progress made by the supervised Greek banks on their risk profiles and solvency levels. This progress is reflected in the improvement of their annual SREP scores. In addition to this, the positive developments detected in the 2023 stress test have been factored into the assessment of their capital position. Regarding dividend distributions, any decision would have to be taken only when a clear view of the 2023 performance has been established. This would also have to be informed by an associated three-year capital plan and an assessment of the updated scenarios and available capital buffers.

There is an ongoing discussion in Greece regarding the degree of competition that exists in several sectors, including banking. There are only four ECB-supervised Greek banks but there are plans to set up a robust, non-systemic banking pillar in 2024. Do you believe that the banking sector in Europe should move towards having more banks in order to strengthen competition? Or should it have fewer but stronger banks? I ask this also in light of what happened last year with Credit Suisse.

Competition is the responsibility of the competent national authorities and the Hellenic Competition Commission made some relevant announcements last week, so I can’t really say very much on that topic. In comparison with the rest of Europe, Greece has a rather concentrated banking market. However, we have observed that competition is gradually increasing owing to the presence of fintechs, non-banking institutions and banks from other countries. At the retail level, Greek colleagues of mine are taking advantage of the options available to reduce their transaction costs, when travelling, for example. And at the corporate level, large Greek companies can borrow directly in the capital markets. As for the European banking sector, I am of the view that Europe is overbanked compared, for instance, with the United States, and that a certain degree of consolidation is needed. This is of course a market-led process, whether domestically or at the cross-border level, which cannot be influenced by supervisors. Having said that, from our perspective we see more cross-border M&A activity as a way of helping euro area banks strengthen their profitability and their ability to invest in technology, which is essential for them to remain competitive in an increasingly digitalised market with several new entrants.

In your opinion, what are the greatest challenges the Greek banks will face in 2024? What should their priorities be? Is the strong profitability momentum sustainable given the expected rate cuts by the ECB in the coming months?

Banks’ profitability should continue to benefit from higher net interest income as there’s a lag in the transmission of changes in interest rates. Greek banks ought to take advantage of improved profitability to strengthen their position. First, they should further reduce NPLs, which still account for a larger share of bank loan portfolios than in the rest of the euro area. Second, they should further strengthen their capital buffers, which are needed to absorb potential future losses from higher interest rates and also to increase lending capacity. Third, they should ensure that profitability is based on sustainable sources. Fourth, they should invest in digitalisation to remain competitive. Fifth, they should incorporate climate-related and environmental risks into their business strategy. To mitigate and disclose these risks, it is important to align Greek bank practices with current regulatory requirements and supervisory expectations. In a nutshell, I’d like to emphasise that it is critical for Greek banks to have strong governance and risk management standards, to remain prudent on lending standards and to be careful in the valuation of business projects and investments. In this regard, having a strong and challenging management body is very important.

There is a new law in Greece that allows non-bank financial institutions (NBFIs) to lend to households and businesses that are considered non-bankable according to European Banking Authority (EBA) rules. Are you concerned that this could lead to high-risk lending because of supervisory rules that are more “relaxed” than those applied to systemic banks?

The growth of the NBFI sector over the last decade globally, including in Europe, is a source of concern. This is because, in general, the sector is opaque, which means that risks that are not within banking supervisors’ line of sight could be developing. These risks could include the build-up of synthetic and financial leverage, liquidity risks or correlation risk stemming from common exposures of banks and non-banks.

There is currently a stock of non-performing exposures totalling €90 billion in Greece. The question is whether, and how, cured loans could eventually return to the banking system. This could give banks’ weak credit expansion a bit of a boost but, first and foremost, it would benefit the businesses and households that have recovered but remain excluded from the banking system. Could this be allowed from a supervisory perspective?

Certainly, re-performing loans may eventually return to the banking system. However, it is important to recall that there are some minimum expectations set out in the regulation and the guidance from the EBA regarding the preconditions for a loan to be considered cured. In this context, the ECB has to ensure compliance with those supervisory expectations.