Yannis Stournaras: The Greek experience in dealing with
NonPerforming Loans and the challenges ahead for EU banks
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the
NonPerforming Loan (NPL) Meeting 2024 "Step Forward", organised by Banca Ifis,
Cernobbio, 27 September 2024.
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I would like to thank the Chairman of Banca Ifis for inviting me in this very interesting
forum.
In my short intervention today, I will share with you our experience in dealing with NPLs
in Greece and I will then outline the key challenges ahead for the banking system in the
euro area.
Part A: Dealing with NPLs in Greece
As you all know, Greece suffered greatly throughout the previous decade from an acute
economic crisis that reduced domestic GDP by ~25%. We experienced an economic
contraction that is equivalent to some of the worse post-war crisis episodes in global
economic history.
Inevitably, the economic recession took a toll on the asset quality of all Greek lenders.
Within just a few years, about half of the banks' loan book was non-performing. NPLs
became the largest asset class in Greece - for the Small and Medium-Sized Enterprises
(SMEs) and the Small Business and Professionals (SBPs), which are the backbone of
the Greek economy, about two thirds of the obligors were in default at the peak of the
crisis.
Today, the picture is completely different, as banks have managed to reduce their NPLs
ratio to just north of 5% (which is closer to the EU average) through a combination of
measures, notably using an Asset Protection Scheme called 'Hercules' which is similar
to the Italian GACS.
If I can briefly outline the key takeaways from our experience in dealing with NPLs over
the past decade, these are the following:
First, it is important to understand that dealing with NPLs in a systemic crisis
requires a multi-faceted strategy that includes legal, operational, and financial
aspects.
he timely recognition of the problem and the need to take policy actions at an
early stage are of utmost importance. Having said this, I fully acknowledge the
difficulty to address legacy loans in a recessionary environment. NPL reduction is
more feasible in a growing economy (e.g. improving financial position of
households and non-financial corporates, increasing collateral value, etc.).
Strengthening the legal framework for bankruptcy and insolvency procedures is
essential. Streamlining processes such as collateral enforcement and speeding
up judicial procedures significantly contribute to reducing NPLs. In a nutshell, all
kind of impediments to NPL workout should be removed. That was a very
important lesson learnt during the past decade.
To give you an example: in the early years of the crisis, it became evident
that some kind of protection for the primary residence was necessary, to
ensure social cohesion and the protection of vulnerable obligors. In 2010,
the then government introduced a Law that aimed to protect homeowners
from foreclosure by offering protection to primary residences under certain
conditions. However, some deficiencies in the design of the measure
resulted in the erosion of the payment culture and encouraged the
emergence of the so-called 'strategic defaulters'.
Since then, Greece has reformed its insolvency laws, making it easier for banks to
recover assets. The new insolvency framework aimed to accelerate proceedings,
reducing the time it takes for banks to recover funds from insolvent borrowers. In
addition, the introduction of electronic auctions for foreclosed properties streamlined the
process, allowing banks to recover funds more quickly and efficiently.
Banks also need to have an adequate NPL governance function to deal with the
problem. They should also have the proper capital and provision cushions to
absorb the losses associated with NPL management.
The role of the supervisor is important here. Continuous and rigorous supervision by
authorities ensures that banks adhere to NPL reduction plans. Supervisors must
monitor banks' progress and impose corrective actions when targets are not met. The
SSM also played a critical role in pushing banks to offload their NPLs through the
application of the so-called 'prudential backstop' as a Pillar 2 measure.
Facilitating the development of secondary markets for NPLs, where these assets
can be sold to investors, is vital. This includes creating a regulatory environment
that attracts investors and ensures transparency and fairness. On transparency, I
would like to point out that having publicly available data on recoveries is useful (I
understand that such data is available in Italy).
Another important lesson is that it is impossible to address quickly the problem
without a systemic solution for NPLs (such as an Asset Protection Scheme (APS)
or an Asset Management Company (AMC)). The design of the scheme is of equal
importance, to ensure minimum impact on taxpayers.
The clear benefit in Greece from the introduction of the Hellenic Asset
Protection Scheme ('Hercules') was the quick clean-up of banks' balance
sheets. Before the introduction of HAPS, banks were unable to deliver a
material improvement in their asset quality, and the key driver of NPL
reduction was loan write-offs. The introduction of HAPS changed completely
the landscape (also for the LSIs, where it is typically even more difficult to
deal with NPLs). Banks of course recorded a substantial loss, but this loss
was lower compared to an outright sale. At the same time, banks got capital
relief, since the senior notes they hold bear the Greek government
guarantee and thus have a zero risk weight.
Effective coordination among the government and supervisory authorities is
crucial. The implementation of reforms and frameworks (like the NPL reduction
plans) needs alignment between these entities to be successful.
Private debt resolution is also important from a macroeconomic perspective. Even
if the NPLs are off the banks' balance sheets, the debt is still there and should be
duly addressed. The role of NPL servicers is very important in this respect - debt
needs to be restructured and/or forgiven to allow obligors a second chance. If this
is not done, the result will be that a significant proportion of economic agents are
no longer bankable.
Finally, I would like to stress the importance of governance and transparency. As
there is no cloud without a silver lining, the crisis forced Greece to implement the
most advanced governance and transparency measures in its financial
institutions, Systemic as well as Less Significant ones. Among other things, even
the smallest cooperative bank in Greece is now applying International Accounting
Standards, while there are no exceptions to European directives or SSM rules.
Part B: Challenges ahead for EU banks
Now, let's move on to the EU banking system and the challenges ahead.
EU banks have currently solid fundamentals that were gradually built up after the Global
Financial Crisis. To give you some more colour on this, based on the EBA Risk
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Dashboard :
In December 2009, the Total Capital Ratio (TCR) of EU banks was 13%. Since
then, banks executed several capital accretive actions and now enjoy wide capital
buffers with an average TCR at 20% in March 2024.
The most impressive improvement was in asset quality, as banks lowered the
average NPE ratio from levels close to 7% (in 2016) to 1.9% in March 2024.
Banks' profitability has also improved lately, as the net interest income of most
lenders benefited from the increase in interest rates. Recall that, at some point in
time over the previous decade, the average Return on Equity (RoE) for EU banks
was barely positive. With March 2024 data, the average RoE for EU banks
reached 10.6%.
Finally, EU banks enjoy ample liquidity with a solid deposit base and full access to
the wholesale and capital markets. In March 2024, the average Liquidity
Coverage Ratio (LCR) of EU banks was 161.4%, well above the supervisory
minimum of 100%.
The positive macroeconomic environment is also supporting the financial fundamentals
of EU lenders. However, risks to financial stability have been rising:
Geopolitical risk remains high for some time now, since the Russian invasion of
Ukraine, and is further fuelled by the tensions in the Middle East. Political
developments in the US and the EU are also creating uncertainty. Geopolitical risk
is an exogenous risk factor which could potentially have immense repercussions
on the banking sector.
A reassessment of risk premia following a sudden shift in market sentiment could
put asset prices under strain with potential implications for the sector of non-bank
financial institutions (NBFI). Past events showed us that the non-bank financial
sector can amplify worsening markets conditions through forced asset sales to
address margin calls or potential liquidity needs. Risks and vulnerabilities in the
non-bank financial sector could essentially create spillovers to banks (via loans,
securities, etc.) and to the real economy.
The recent rise in interest rates alongside high inflation rates put the balance
sheet of some firms and households under strain. Against this backdrop - and
despite the recent drop in the interest rates -, a deterioration in asset quality and a
rise in loan loss provisions for European lenders with a time lag cannot be ruled
out.
In addition, weakening economic growth along with high interest rates could weigh
heavily on the demand for new loans and the implementation of banks' business
plans. Note that the improved profitability following the rise in interest rates
masked structural deficiencies in many banks, such as in terms of cost efficiency
and digitalisation.
The increase in borrowing costs over the past few quarters has led to a cooling of
the real estate market in the euro area, notably the commercial real estate
segment. A fall in real estate prices could expose some property developers to
losses and consequently impact the cost of credit risk for some European lenders.
Several new risks have recently emerged in our risks heatmap, such as the
climate change risk and the risks stemming from cyber-attacks. The latter is
closely linked to the rising geopolitical risk.
Concluding, despite the progress so far, there is no room for complacency. As risks to
financial stability remain, supervisors should ensure that financial institutions are
cautious in their business decisions and preserve ample capital and liquidity buffers,
while upholding top governance standards. Macroprudential supervisors should also
preserve capital buffers with the aim to increase resilience in the system.
Finally, we need to revamp our crisis management framework and complete the
Banking Union. The adoption of a common European Deposit Insurance Scheme
(EDIS) at the level of the banking union is necessary to strengthen depositors'
confidence, especially in case of cross-border turmoil and systemic crisis. The
completion of the Banking Union with the adoption of a common framework for Crisis
Management and Deposit Insurance (CMDI) will facilitate the integration of the, so far,
fragmented banking sector in the European Union along the lines suggested by the
Draghi Report and achieve level playing field in European banking regulation and
resolution.
Thank you.
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https://www.eba.europa.eu/risk-analysis-and-data/risk-dashboard