yannis stournaras : a systemic approach towards improving asset quality of greek banks speech by mr yannis stournaras, governor of the bank of greece, at an event " tackling npls within the greek banking system ", hosted by the hellenic bank association and facilitated by pwc, athens, 24 january 2019. * * * it is a real honour for me to participate in this event and to be given the opportunity to discuss the crucial issue of dealing with non - performing loans ( npls ), by far the most significant legacy of the crisis and a major constraint on the efforts of the real economy to achieve faster and sustainable growth. the completion of greece ’ s third financial support programme signaled the end of a long period of adjustment for the greek economy. in this context, several structural reforms have been implemented, although further changes will be needed in the years ahead. this is our only option if we are to ensure that the progress achieved thus far will not be reversed. the protracted and deep crisis that greece experienced over the past ten years has brought about three major changes that are relevant to its growth model. first, bank lending, which used to be the main source of financing for households and businesses, has declined dramatically. second, private investment has shrunk. third, the production structure has become more outward - oriented, although this has occurred against a background of recession in the domestic economy. starting with the changes in the real economy, the transition to a new, more extrovert growth model has already begun and can be expected to continue. however, developments in productive investment, as a key driver of growth, have been less encouraging, pointing to a need for more progress in this area. in 2017, net capital investment of enterprises, i. e. gross investment less depreciation, stood at – 2. 8 billion euros or 1. 6 % of nominal gdp ; this disinvestment trend has since strengthened, with net capital investment amounting to – 3. 7 billion euros or – 2. 0 % of nominal gdp in the second quarter of 2018 in annualised terms. however, in order to increase the capital stock and thus the potential output of the greek economy, positive net capital investment is indispensable. for this to happen, private investment must grow by about 50 % within the next few years. in other words, the greek economy needs an investment shock, with a focus on the most productive and extrovert business investment,

funding. the proposal is intended to provide a systemic solution to this problem, without imposing any additional burden on the greek taxpayer. as said before, this proposal effectively addresses two key issues faced by greek banks : npls and deferred tax credits ( dtcs ), currently accumulated on banks ’ balance sheets. at present, capital adequacy ratios remain satisfactory and significant capital buffers are in place, although the probability of posting additional losses is limited by the possibility of triggering legislation on deferred tax credits. under the current legal framework, a credit institution which in a given financial year records losses as a result of transfer, write - off or impairment of npls must increase its capital in favour of the state, by an amount equal to the share of the deferred tax asset, i. e. 29 %. in effect, the state receives compensation in the form of new equity, thus diluting private shareholders. it is therefore understood that there is a limitation on credit institutions as regards the effective use of their own funds for the purpose of improving the quality of their balance sheets. possible conversion of a sufficient portion of these credits into shares would cause the drastic reduction of the participation of private shareholders and the acquisition of an overwhelming majority of equity by the state. instead, a move along the lines proposed by the bank of greece would bring about a direct and drastic reduction in the ratio of non - performing loans and would allow, under certain conditions, to target a single - digit ratio within three years. moreover, it would establish favourable conditions for supporting operating profitability and internal capital generation, because of improved asset quality and resilience to shocks in the event of a future crisis. finally, it would enable the reshaping of the business model of banks and alleviate the uncertainty regarding their mediumterm prospects. it should also be noted that the implementation of such an initiative would benefit the sector by correcting what is currently perceived as a large share of dtcs in capital adequacy ratios, while it would allow banks to access market opportunities through a different investment case. the main elements and characteristics of the bank of greece proposal are as follows : the proposed scheme envisages the transfer of a significant part of non - performing loans ( npls ) along with part of the deferred tax credits ( dtcs ), which are booked on the banks ’ balance sheets, to a number of special purpose vehicles ( spvs ). loans will be transferred to the net book value