By Angelika Papamiltiadou
ATHENS (MNI) – Greece’s central bank is preparing to conduct a
series of tough stress tests on all Greek banks in order to distinguish
the ones that are financially stable from the ones that are not.
The banks that fail the test and cannot raise the required capital
will be automatically put under the supervision of the Financial
Stability Fund (FSF), an entity that is to be formed expressly for that
purpose.
According to the terms of the E110 billion EMU/IMF financial aid
package for Greece, Greek officials must “ensure that financial
stability is fully operational.”
The agreement states that by the end of June the Greek government
must pass the required legislation to form the FSF and finance it with
10 billion euros, money that is to come from the EMU/IMF financial aid
package. The Bank of Greece will be charged with ensuring that the FSF
is fully operational and that it starts performing the bank stress tests
as of July 1.
“The test’ criteria will be tough and will aim to establish which
banks have sound fundamentals,” a Bank of Greece official told Market
News International.
“The agreement says that whenever supervisory assessments conclude
that a bank’s capital buffer might fall below adequate levels, the
shareholders will be required to immediately bring additional capital or
take bridging capital support from the FSF,” he added. “If banks are
then not able to expeditiously raise additional capital on their own and
repay the FSF, a restructuring process will take place under the lead
of the FSF.”
The specific criteria of the stress tests are so far being kept
secret by the Bank of Greece.
“All I can say is that the participation in the stress tests is
mandatory and the requirements are much tougher than in the past because
the purpose is to ensure financial stability in the medium and long
term,” the official added.
The mere prospect of the tests has launched a series of
behind-the-scenes discussions about possible mergers and acquisitions
among state-owned and private Greek banks. The Greek press has widely
reported that the Ministry of Finance is quietly pushing for a merger
between the largest state bank, Ethniki, and one of the larger private
ones to secure Ethniki’s future in the long term.
The FSF will work alongside the Bank of Greece and, according to
the agreement, “will enjoy certain powers over credit institutions to be
exercised following consultation with the Bank of Greece. These powers
will be without prejudice to the supervisory powers of the Bank of
Greece.”
Greece’s agreement with the European Commission, the ECB and IMF
has given the Bank of Greece the authority to implement intensified
supervision and increase the resources dedicated to banking supervision.
“This will include an increase in the frequency and speed of data
reporting, and the further development of a comprehensive framework for
regularly stress-testing financial institutions,” the agreement says
The FSF is slated to exist for seven years, after which its
authority — and subsequently the management of any banks still under
its supervision — will be passed to the Greek government, which is the
sole shareholder.
The FSF’s chairperson, chief executive and three directors will be
appointed by the governor of the Bank of Greece. According to the
agreement, there will be a free exchange of confidential information
regarding the state of Greek banks between the FSF and the central bank
and a semi-annual report will be presented to the Greek parliament.
The FSF’s officials will have specific powers including the right
to veto key decisions of a bank, such as the business strategy, salary
caps, and liquidity management; the right to require a bank to present a
restructuring plan; and the right to call a general shareholders’
meeting of a bank in accordance with Greek corporate law.
The FSF and Bank of Greece officials that will be conducting the
stress tests will be “granted strong legal protection,” the agreement
stipulates.
The European Commission, the ECB and the IMF said the stress tests
were necessary because “the immediate challenge for the banks is to
manage carefully the current tight liquidity conditions” in a difficult
environment in which they have “increasingly relied on Eurosystem credit
operations.”
Moody’s recent four-notch downgrade of Greece and subsequently of
six Greek banks, and the additional haircut of 5% imposed by the ECB on
Greek bonds, has sparked a new round of speculation about whether the
Greek financial system is sound.
Speaking on television recently, Greek Finance Minister George
Papaconstantinou acknowledged that Greek banks might now face tougher
borrowing conditions, but all deposits are safe.
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