Running head: The banking regulatory and market framework in Greece

The banking regulatory and market framework in Greece: Strengths, Weaknesses, Opportunities and
Threats

Dimitrios V. Siskos
Doctorate of Finance

This paper is submitted in partial fulfillment of the requirements for

Commercial & Investment Banking
SMC University
School of Management
Dr. Geoffrey Vanderpal
October 8, 2013

www.thinkingfinance.info

Table of Contents
Abstract..............

1.0 Historical review............... 4

2.0 The banking regulatory...................................

3.0 Market framework.......................................................................................

4.0 Strengths, weaknesses, opportunities and threats in the Greek banking

industry......................................................................................

a. Strengths..............................................................................

b. Weaknesses.............................................................................. 9
c. Challenges..............................................................................

d. Threats..................................................................................

5.0 Conclusions ....................................... 10

References.....................................

12

Appendices.....................................

13

www.thinkingfinance.info

Abstract
The paper seeks to identify and explore major challenges, opportunities, weaknesses, and threats of
banking in Greece, and hence, the system of Greek banking. Initially, the study examines the concept of
Greek banking regulatory and how it has been shaped based on the special conditions of the Greek economy.
The second part of the paper is to study the responsiveness of the Greek banking sector regarding the recent
crisis. Lastly, the third part of the paper provides a SWOT (Strengths, Weaknesses, Opportunities and
Threats) analysis of the present banking conditions in Greece. Special emphasis will be given to the relation
between the Greek banking regimes in relation to the EU banking system. Conclusions are drawn a propos
the Greek banking system and the monetary policy for the upcoming years.

Keywords: Banking, Regulation, Risk, Crisis, Liquidity.

www.thinkingfinance.info

1.0

Historical review
The modern Greek state and the Greek banking system are concepts which developed at the same time,

both influenced by the same facts, and their transformation through years is considered to be proportional. As
Karatzas (2003) refers characteristically, the Greek banking system evolved in parallel with the modern
Greek state.
The countrys oldest and largest commercial bank is the National Bank (NBG). The National Bank of
Greece S.A. was founded in 1841 and has been listed on the Athens Stock Exchange since 1880. Before that
and during the Interwar period, especially around 1920, two distinct time periods can be discerned: one, from
1922 to 1927 and the other, the Great Depression of the years 1929-32. During the first period, there was a
rapid increase of the number of commercial banking institutions, established by a number of local
businessmen, operating in the form of public limited company (Spanodimou, 2010). However, part of them
survived during the following economic crisis, known as the Great Depression of the years 1929-32.
In 1928, the Bank of Greece was established as the countrys central bank as response to foreign
factors demands and to the need for a modern banking system. Spanodimou (2010) highlights the scope of
the central bank, which were the currency stabilization and the recovery course of the Greek economy.
In the postwar period, many European banks were obliged to finance their countrys economic
development and industrialization. Following that trend, the Greek banking system was required to provide
low-cost credit for industrial development. Gortsos (2007) verifies that position referring that during that
period the government intervention was covering the pricing, volume and allocation of financial resources of
the economy, resulting to a complex system of quantitative and qualitative credit controls, banking
restrictions. All these created a protective over-regulation banking system which remained almost the same
until the 1980s, whereas interventionism degenerated into high inflation and large deficits. These results
www.thinkingfinance.info

made many European countries to reform the existed bank regulations, suggesting the liberalization of the
financial system, the interest rate deregulation, the abolition of direct credit controls, the modernization of
money, capital markets as well as payments, the rationalization of monetary policy and the adoption of the
single European currency (Gortsos, 2007).
During the decade between 1990 and 2000, Greek banks exploited the liberalizations advantages and
they strengthened their portfolios adding a wide range of financial services, such as asset management,
insurance, mortgage lending and consumer credit also experienced considerable growth and diversification.
Karatzas (2003) certified such progress referring that besides activities, Greek banks developed alternative
distribution channels (Internet and mobile telephony) growing faster the labor productivity in the banking
sector.
Maybe the greatest moment in financial history of Greece was the entry into the euro zone in 2001 as it
was widely seen as marking a transformation to a new regime. Between 2001 and 2008, the financial
environment was deeply influenced by the blooming of the banking sector. As noticed by the Governor of the
Bank of Greece, Mr George Provopoulos (2013), the real growth averaged almost 4 per cent a year, inflation
fell to the low single digits, and interest-rate spreads between 10-year Greek and German sovereigns dropped
to between 10 and 50 basis points, from over 600 basis points in the late 1990s. However, bank profits begun
to decline, following the loss of a traditional source of commission income coming by the successful
transition to the Euro. These were years when Greece banks were unaware of the following crisis tsounami.
At the time 2009 since now, as Kouretas and Vlamis (2010) underlines, the share of government debt
had increased to almost 130 per cent of GDP, while the fiscal deficit had reached 15 per cent of GDP.
Moreover, CNN reported that many European banks have been offloading Greek subsidiaries as they seek to
minimize exposure to the troubled country, while Greek banks are also facing recapitalization demands in
return for cash assistance.
2.0

The banking regulatory

www.thinkingfinance.info

The Bank of Greece (BoG) is responsible for the regulation of credit institutions and for the oversight
of the payment system. Its role, also, includes the stability and efficiency of the banking sector and securing
the transparency of the procedures and transactions taking place within that sector. Hadjiemmanuil (2004)
highlights the functions of the BoG under four headings:

responsibility for the authorization of credit institutions;

continuing prudential supervision;

regulatory rule-making; and

enforcement.
Regarding the first regulatory function, the BoG has the power to evaluate institutions interested in

entering the banking sector and grant or not the requisite license. Particularly, the evaluation process includes
the initial paid-up share capital of the bank, the fitness of shareholders possessing 10% or more of the capital
or of the voting rights, the quality of management and the program of operations and internal organization of
the institution (Hadjiemmanuil, 2004).
One of the main characteristics of the contemporary Greek Banking System is the concept of the
universal banking prototype, which according to Gortsos (2007) means that banks may provide both
commercial and investment services. In fact, they can also provide assurance ones. Thus, the second function
of the BoG describes the responsibility to cover the provision of such universal banks as well as to supervise
both the domestic operations of credit institutions domiciled in Greece and their branches in other MemberStates so as to efficiently audit managerial and accounting arrangements.
The next regulatory function describes the executive role that BoG holds in relation to the Acts of the
Governor. Regarding the first one, the BoG uses its extensive rule-making powers for economic-policy
purposes, and also for the purpose of regulating the transactional behavior of banks.
The last function refers to the BoG relation to the consumers. As stated by the European Central Bank
at the request of the Bank of Greece on a draft provision on the Bank of Greeces powers in the field of
www.thinkingfinance.info

consumer protection (CON/2006/38), the BoG has the power to impose sanctions in case of failure to comply
with the rules and the procedures for imposing such sanctions.

3.0

Market framework
The Greek banking sector is considered to be large for the countrys needs, given that recent financial

crisis requires a more consolidated financial structure. Gortsos (2011) research highlighted this banking
polyphony, recording that the banking sector consists of 60 banks with 4,200 branches and 64,000
employees. In fact, there are four categories of banks operating in Greece:

18 commercial banks established in Greece

16 cooperative banks established in Greece

22 branches of banks established in another Member State of the EU

4 branches of banks established in third countries (outside the EU)

According to the same research, Greek banks manage an equivalent of 113% of the Greek GDP, hold

an equivalent of 106% of the Greek GDP in deposits and repos and lend 115,6 billion for housing purchase
and consumer credit, which means an equivalent of 10,246 per inhabitant. The composition of the bank
loans is separated into 14% to consumer credit, 54% to corporate loans and 32 % to mortgage loans.

Corporate Loans
Mortgage Loans
Consumer Credit

Figure 1
www.thinkingfinance.info

Despite the domestic factors, the market framework in Greece has been influenced by external ones.
Since Greece is member of the European Union, it was quite predictable that the establishment of a native
financial market would be influenced by EU regulations. First of all, EU encouraged the Greek Banking
system to freely provide cross-border financial services within the European Union. According to the
findings of the EU Forum Group no VI in October 2001, such services were:

the current account opening in any EU country;

the cash pooling throughout EU members;

the establishment of electronic signatures for commercial transactions in the EU; and

the greater involvement of the banking sector in the development and application of the new capital
adequacy process.
Second, the Greek banking system adopted the suggested by the EU prudential supervisory measures

such as capital requirements, large exposures and corporate governance. In particular, the BoG implemented
the Basel III agreement, specifically the CRD IV package, which transposes -via a Regulation and a
Directive- the new global standards on bank capital, proposes tough large exposure framework and
supervisory measures.
4.0

Strengths, weaknesses, opportunities and threats in the Greek banking industry

a. Strengths
Greece is a member of the European Union and thus, it is not alone. In recent years the scale of external
support to the country has become clear. Particularly, the financial-rescue packages funded by the
International Monetary Fund, the European Union and other IFIs, were very important for the viability of the
domestic banking system. Generally, the strength of the Greek banking system is attributed to the following
six factors as stated by Georgikopoulos (2009):
1. The almost insignificant exposure of Greek banks to problematic high-risk financial products.
2. The small leverage in the balance sheet statements of banks (Appendix I).
www.thinkingfinance.info

3. The strong deposit base.

4. The satisfactory liquidity in the system, which is attributed to the strong growth of the Greek economy
during the last few years and the expansion of Greek banks to the rapidly developing countries of southeastern Europe.
5. The relatively satisfactory capital adequacy.
6. The capital structure of supervisory own funds which is of a relatively good quality.
b. Weaknesses
Before the recent crisis, Greek banks benefited greatly from the high lending growth, especially in
housing and consumer loans, the strong economic performance, and their accessibility to money markets
mostly because of Greeces participation in the European Union (Dendrinou, 2010). After years of growth,
credit growth rates turned negative in 2009, because of the financial crisis, and this remain until now. With
the country facing the most severe recession of recent decades, Greek banks face grave liquidity problems
caused by the explosion in NPLs, deposit outflows and their participation in the PSI are rejecting the great
majority of new loan applications across all lending categories.
c. Challenges
Under current difficult conditions, the challenge for the Greek banking system has mainly three aspects:
1. To maintain the stability, with adequate capital adequacy ratios and adequate liquidity.
The main challenge for the Greek banks is to sustain capital adequacy in the face of falling loan quality
as well as to preserve adequate liquidity. (Dendrinou, 2010)
2. To be the precursor of a new financial era, regenerating the basic pillars of the Greek economy.
To assist enterprises and households to accommodate with the inconveniences caused by the recent
economic downturn. (Gortsos, 2011)
3. To comply smoothly with the recent regulatory terms.

www.thinkingfinance.info

10

On the medium term, to comply smoothly with the regulatory storm underway (Basel III, Review of the
Deposit Guarantee Schemes Directive, banking resolution, taxation of the financial sector, SIFIs)
(Gortsos, 2011)
d. Threats
Nowadays, the main threat that the Greek banks face is coming by the fact that there is a persistent
rumor among the banking sector that Greece will exit the euro zone. In that case, Greek banks will see their
funds converted to drachma, depreciating most of their initial value. Generally, the change to another
currency regime would be extremely painful for the banking sector. The cost of a possible Greek exit is very
high, especially counting the damage done to balance sheets of Greek banks. As Durden (2012) notes when
the possibility of a Greek exit becomes known, there will be a bank run in Greece and denial of further
funding to any and all entities, private or public, through instruments and contracts under Greek law. In fact,
the Greek banking system would be destroyed even before Greece had left the euro area. However, the
consequences of that possible scenario could trigger a domino effect, or contagion as it has been called,
which could spread to banks both in euro zone and in non-euro zone countries.
5.0

Conclusions and Recommendations

Since Greece follows the same banking laws that go into European Union banking, it was rather logical

to turn the argument, concerning the regulations, to a broader concept and system: the EU banking
regulations. However, as Dincer and Neyapti (2008) resulted, adopting and implementing the EU regulations
did not lead to increased bank stability for the Greek banking system. On the contrary, the recent financial
crisis was probably the very first major test that European banking was put through, and the results were
nothing less than satisfactory. Greek and almost all banks of the south Europe region (Italy, Spain, and
Portugal) were affected by the lack of liquidity, the weakness in lending new money and the explosion of
the red loans. This made banks to turn to central banks for support, but governments did not have the
money required. Thus, banks have to search for solutions in a different way in relation to the past.
www.thinkingfinance.info

11

At first, Greek banks should find ways to strengthen the risk management processes, methodologies,
controls and improve governance. Dendrinou (2010) confirms that position claiming that the financial
institutions need to find the appropriate balance between improving asset quality, harnessing the cost of risk
and providing the necessary liquidity to the economy. Other key factor that will determine the extent of the
successful survival of the financial crisis is to focus on changes in the supervisory and regulatory framework,
aiming at enhancing the stability of the banking system. The Basel Committee recently published proposals
(Basel III) on ways to redesign the existing regulatory capital and liquidity framework. For example, it is of
critical importance for the Greek banks to maintain considerable capital margins above the required
minimum levels, mostly by promoting internal financing. Furthermore, they should take great caution in
strengthening their ability to absorb any unforeseen losses and in prudently managing payouts (Dendrinou,
2010).
During that effort, the Greek banking sector should not be isolated by the Central European Bank. Even
the most reluctant to help, should consent to provide financial aid so as to prevent a crisis spreading
throughout Euro zone. Indeed, France already proposed to provide direct aid to Greek banks hoping to gain
much traction by the other EU members. Particularly, the French Europe Minister, Thierry Repentin, told the
German business daily Handelsblatt that "A lot of things would be much easier if the euro-zone bailout fund
were already able to directly recapitalize Greek banks".

www.thinkingfinance.info

12

References
Dendrinou, E. (2010). Assessing the performance and regulation of the Greek banking system,
Available at: http://www.bis.org/list/cbspeeches/index.htm
Dincer, N. and Neyapti, B. (2008). What determines the legal quality of bank regulation and supervision.
Contemporary Economic Policy, 26 (4), 607-622.
Durden, T. (2012). If Greece Exits, Here Is What Happens, Available at:
http://www.zerohedge.com/news/if-greece-exits-here-what-happens
Georgikopoulos, N. (2011). Strength of the Greek Banking System, Available at:
http://www.europeanbusinessreview.eu/page.asp?pid=296
Gortsos, C. (2007). The Current Structure of the Greek Banking System Trends and Developments. Panteion
University of Athens.
Gortsos, C. (2011). The Greek banking system during the Greek debt crisis. Panteion University of Athens.
Hadjiemmanuil, C. (2004). Greek system of financial regulation: in need of structural streamlining and
procedural safeguards, paper presented at the Hellenic Observatory Research Seminars, 3 February

www.thinkingfinance.info

13

Karatzas, Th. (2003). The Greek Banking System. 96th Conference of the Board of Directors of the
Banking Federation of the European Union. Hellenic Bank Association
Kouretas, G. and Vlamis, P. (2010), The Greek crisis: causes and implications Panoeconomicus, 57(4), pp.
391-404.
Provopoulos G. (2013) The Greek economy and banking system - recent developments and the way forward.
Conference The crisis in the euro area
Spanodimou, S. (2010). The Greek Banking system after the 1929 crisis (First draft). University of Athens

Appendices
Appendix I: Statements of Financial Position of National Bank of Greece (as at 30 September 2012)

www.thinkingfinance.info

14

www.thinkingfinance.info