ECB to Start Stress Tests at Greek Banks in February

  • Results of tests to be released by June, before bailout ends
  • Authorities are running onsite inspections for NPL portfolios

Greece's Papadimitriou on Bailout, Debt Relief

The Bank of Greece plans to start stress tests for the country’s four systemic banks in late February with a view to determine by June if they need fresh capital before the end of the Greek bailout program.

European Central Bank President Mario Draghi said Monday that the Single Supervisory Mechanism may front-load stress tests for Greek banks. Banks have been asked to send data by the end of February, a Bank of Greece official said, requesting anonymity in line with policy. Another official said the results of the tests may even be ready in the first two weeks of May.

As Greece prepares for a post-bailout era when the program ends in August, shrinking bad loans at banks has become the most pressing issue. At the end of the first semester non-performing loans, excluding off-balance sheet exposures, stood at 72.8 billion euros ($86.4 billion), missing the target set by supervisory authorities for 72.4 billion euros. The non-performing exposure ratio was 50.6 percent, higher than the 50 percent target.

The push to complete the stress tests comes after the International Monetary Fund’s demand in July for a new asset-quality review, or AQR, for Greek banks. The AQR request has cast a shadow over the banking system and economy. Since late July, the country’s banking index has tumbled more than 30 percent.

The fund’s demand would result in a “further erosion of investor confidence in Greece and an undermining of European banking regulators’ political independence,” founder and chief investment officer of Hayman Capital Management, J. Kyle Bass, wrote in an article published by Bloomberg.

NPL Focus

The Greek government, the Bank of Greece and the ECB say that such an AQR would harm the nation’s lenders because they need to focus on addressing the NPL issue.

The FTSE Athex Banks Index, which includes Greece’s four largest banks, fell almost 12 percent on Monday and slid another 6.5 percent at 11 a.m. on Tuesday in Athens. Alpha Bank SA dropped 6.3 percent, Eurobank Ergasias SA fell 4 percent, National Bank of Greece SA slid 4.6 percent and Pireaus Bank SA tumbled almost 18 percent.

“Uncertainties clouding Greek banks will remain in place until May, or June, when the impact of the series of underway/forthcoming exercises will be fully known,” according to analysts at Pantelakis Securities.

The country’s creditors have criticized Greece for not moving fast enough to reduce NPLs. An electronic auction of bad loans, for example, which was supposed to have started in September, has yet to be operational and will need a few more weeks before it can process orders.

The authorities are currently running onsite inspections at two of the four banks -- National Bank and Alpha Bank -- to assess their NPL portfolios while the other two -- Piraeus Bank and Eurobank -- will follow in the coming months. The goal is to see whether the banks have adequate provisions and whether they will need to raise more capital.

With the results of the Bank of Greece stress tests due before the end of the bailout program, banks may be able to avert another AQR. The matter may be discussed at the IMF’s autumn meeting in mid-October. Greece’s third bailout review officially begins right after the meetings in Washington, with creditor representatives heading to Athens.

“The SSM will take its decisions in full independence, and what the SSM plans to do for next year is to have the stress tests and -- possibly front-loading the stress tests -- and basically the SSM has sent a letter to the IMF concerning exactly this expected line of action,” Draghi said before the European Parliament committee in Brussels.

— With assistance by Nikos Chrysoloras

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