The Impact of the Current Fiscal Crisis in the Euro Area on the Greek Banking System and the Measures adopted to Safeguard its Stability: an Institutional, Supervisory and Regulatory Perspective

I have recently published a study examining the impact of the current fiscal crisis in the Euro area on the Greek banking system, and the measures adopted to preserve its stability. It is divided into 3 Sections:

Section 1 contains an overview of the causes of the recent (2007-2009) international financial crisis and the current fiscal crisis in the Euro area, and their (differentiated) impact on the Greek banking system; Section 2 deals with the institutional, supervisory and regulatory measures adopted to safeguard the stability of the Greek banking system from 2008 until the establishment of the European Banking Union in 2014.

I conclude that the Greek banking system did not burden the Greek state during the recent international financial crisis, but was rather heavily affected by the latter’s over-indebtedness and the subsequent fiscal crisis in the Euro area. During this crisis, the Greek banking system has been completely transformed following:

• the resolution of fourteen credit institutions (including two traditionally large ones); and
• the first two (out of a total of three) recapitalisation rounds of the four systemically important Greek credit institutions.       

Section 3 briefly overviews the main elements of the current institutional and regulatory framework governing banking stability in the EU and the impact of its provisions on the Greek banking system (including the terms under which the third recapitalisation round of the four systemically important Greek credit institutions took place).

As to the recent EU institutional and regulatory developments pertaining to safeguarding banking system stability, the guiding objective of which is to break the vicious circle between banks and sovereigns, my opinion is that the objective of banking stability can only be partly achieved through an appropriate design of the ‘bank safety net’. In that respect, I conclude that it is important to start addressing consistently the need to overhaul the ‘fundamental asymmetry’ within the EU economic and monetary union, and that the establishment of the European Banking Union is not only a goal per se, but also a catalyst to enhance the appropriate consistency, at the Euro area level, of the conduct of the two main macro-economic policies, notably monetary and fiscal.

In my concluding remarks, I identify three main challenges for the Greek banking system in the current conjuncture:

• The first challenge is the preservation of its (few) remaining credit institutions’ solvency. To a large extent, this is linked to the development of the still extremely vulnerable Greek economy, but also depends heavily on the resolution of the problem related to the large stock of non-performing loans. Action is necessary in regard to enhancing debt enforcement and collateral recovery and designing an effective out-of-court restructuring mechanism.
• The second challenge relates to liquidity. Maintaining the current levels of liquidity is also a conditio sine qua non, while the predominant task refers to the creation of favourable macro- and micro-economic conditions for the return of deposits and the gradual access of Greek credit institutions to the European Central Bank and market funding. This would allow them to reduce their disproportionally high (and extremely costly) Emergency Liquidity Assistance financing exposure, and to return to normal lending activities, especially to viable business seeking for borrowed funds.
• Greek credit institutions are also taking significant deleveraging initiatives consisting in disposing of assets, selling non-core foreign assets, cutting claims on foreign financial institutions, and reducing holdings in capital market instruments. In any event, the primary objective is, for a long time now, the preservation, to the extent possible, of private ownership in the banking system.

Christos V. Gortsos is a Professor at the Panteion University of Athens.