Banking News

MoU means Greek banks funding on the way to restoration

(18 August 2015 – Greece) The European Central Bank (ECB) could act early to restore normal funding lines for Greek banks, according to Executive Board member Benoit Coeure, following the new Memorandum of Understanding (MoU) between Greece and its creditors in exchange for a €86 billion (A$129.4 billion) bailout.

Since February Greek lenders have had to rely on Emergency Liquidity Assistance from its own central bank, when the ECB removed a waiver allowing low-quality sovereign debt to be used as capital.

The new MoU bailout deal is tied to financial and fiscal reforms and prompted Coeure to say the ECB could act as soon as October if Greece follows through with its new program.

“Greece’s new program contains a large number of ‘prior actions.’ The question for the Governing Council will be whether these preliminary measures are sufficient to meet our criteria.”

Coeure, who has represented the ECB in international negotiations on Greece’s debt crisis, said the decision-making Governing Council has not yet discussed the waiver.

The council’s next scheduled policy meeting is for 3 September in Frankfurt.

Coeure believes Greek banks should be recapitalised as soon as possible under the new aid program, which includes as much as €25 billion for the purpose, though only after the financial institutions are checked.

The ECB’s bank supervisors have started a new asset quality review and stress test for Greece’s four major banks.

“Those credit institutions were adequately capitalised, but they are now operating in an extremely difficult economic environment, and non-performing loans are likely to increase in the next few years,” Coeure said.

“The banking supervisors will need a few weeks to conclude their assessment.

“For that reason, the recapitalisation should not take place immediately. But it should happen before the end of the year.”

Part of Greek Prime Minister Alexis Tsipras’ deal with creditors includes safeguarding financial stability with a buffer of up to €25 billion to recapitalize Greece’s banks and wind down insolvent ones, with any capital shortfalls in the four major lenders due to be resolved by the end of 2015.

The government will also upgrade its bankruptcy procedures, including tackling the backlog of non-performing loans and “adopting legislation to establish a regulated profession of insolvency administrators”.

Greece will call in external consultants to help it check up on the membership of major banks’ boards, and “members may be replaced in a manner that ensures banks’ boards include at least three independent international experts with adequate knowledge and long-term experience in relevant banking and no affiliation over the previous 10 years with Greek financial institutions”.

Athens has accepted unprecedented oversight of its financial sector from the troika of creditors – the International Monetary Fund, the European commission and the European Central Bank.

As the memorandum says, “all measures, legislative or otherwise, taken during the programme period, which may have an impact on banks’ operations, solvency, liquidity, asset quality etc should be taken in close consultation” with the troika.