‘Stress tests’ for banks by end-Au­gust, fresh cap­i­tal by year-end

Financial Mirror (Cyprus) - - FRONT PAGE -

Greece’s bat­tered banks will un­dergo ac­cel­er­ated tests by the end of this month to un­cover their cap­i­tal short­falls as author­i­ties race to re­cap­i­talise the lenders by the end of the year and avoid pe­nal­is­ing large de­pos­i­tors, ac­cord­ing to re­ports by EurAc­tiv and Reuters.

This scru­tiny by Euro­pean and Greek reg­u­la­tors will be com­pleted af­ter the sum­mer with the aim of plug­ging the cap­i­tal holes be­fore leg­is­la­tion comes into force in Jan­uary that can re­quire big­ger de­pos­i­tors to con­trib­ute to the cost of res­cu­ing a fail­ing bank.

Greek banks al­ready un­der­went stress tests and as­set qual­ity re­views (AQRs) last year as part of a con­ti­nent-wide ex­er­cise that took nine months.

But since then the state of the four main lenders - Na­tional Bank, Pi­raeus, Eurobank and Al­pha - has wors­ened dra­mat­i­cally along with the na­tional econ­omy, mean­ing they need their third re­cap­i­tal­i­sa­tion since Greece plunged into cri­sis in 2010.

Euro­pean Union author­i­ties must find out how much worse things have got be­fore work­ing out the size of the re­quired re­cap­i­tal­i­sa­tion, to be made by ei­ther the Euro­pean or Greek bailout funds.

This means the stress tests, which sim­u­late how a bank can cope with a cri­sis, and the AQRs, which as­sess the value of its as­sets, have to be re-run.

“The com­pre­hen­sive as­sess­ment will be com­pleted af­ter the sum­mer,” a bank­ing source. “It will be a faster process com­pared to last year’s health checks.”

Prepa­ra­tions are un­der way at the Euro­pean Cen­tral Bank on the re­view and the as­sump­tions that will be used. The yard­sticks on how much cap­i­tal the banks should hold un­der nor­mal and cri­sis con­di­tions may not be changed from last year’s ex­er­cise.

“A stan­dard process will be fol­lowed, as­sess­ing the cap­i­tal gap for each bank. The min­i­mum core eq­uity cap­i­tal ra­tio that will be re­quired may be 8% un­der a base­line sce­nario and 5.5% un­der an ad­verse sce­nario, as in last year’s stress test. But this has not been fi­nalised yet,” the source said.

Greece im­posed cap­i­tal con­trols in June to slow mas­sive with­drawals from the banks, but these have ac­cel­er­ated the re­ces­sion that the econ­omy has sunk back into. This in turn has sent the rates of “im­paired” loans at the banks soar­ing.

“The mil­lion dol­lar ques­tion is what the check up will show, how big the cap­i­tal short­fall is,” another source told Reuters.

Ac­cord­ing to fig­ures from Greece’s in­ter­na­tional cred­i­tors, the four banks could need EUR 10 bln to 25 bln to re­store their cap­i­tal base.

Wor­ries that such a mas­sive boost will se­verely di­lute the stakes of ex­ist­ing share­hold­ers pum­melled the banks’ stock prices when the Athens mar­ket re­opened on Mon­day af­ter a five week clo­sure.

Over three days, they lost 63% of their mar­ket value be­fore a re­bound be­gan.

Judged by Euro­pean Bank­ing Au­thor­ity stan­dards, banks’ “non-per­form­ing ex­po­sures” - which in­clude loans in ar­rears for more than 90 days and re­struc­tured credit un­likely to be re­paid - hit 40% of their port­fo­lios last year.

Greece’s bank res­cue fund in­jected EUR 25 bln into the four in 2013 in ex­change for shares, and last year they raised a fur­ther 8 bln from in­ter­na­tional in­vestors.

The Hel­lenic Fi­nan­cial Sta­bil­ity Fund (HFSF) now has ma­jor­ity stakes in all the banks ex­cept Eurobank. It and pri­vate share­hold­ers such as U.S. bil­lion­aire in­vestor Wil­bur Ross, who bought a stake in Eurobank, are nurs­ing huge losses.

Since Jan­uary, when the left­ist-led gov­ern­ment came to power promis­ing to roll back aus­ter­ity poli­cies, the banks have lost 75% or EUR 14.5 bln of their mar­ket value.

Ross, who in­vests in dis­tressed as­sets, said ear­lier this week he has not lost heart. “Our im­me­di­ate con­cern is whether the AQR and the stress test are sen­si­ble and do not go over­board with neg­a­tiv­ity be­cause of the re­cent tu­mult,” he told CNN, adding he might be in­ter­ested in join­ing a cap­i­tal-rais­ing rights is­sue for ex­ist­ing share­hold­ers.

“As long as the treat­ment of the in­sti­tu­tions is fair and not based on wild as­sump­tions, then in prin­ci­ple many of us would be pre­pared to par­tic­i­pate in a rights of­fer­ing.”

Last month, the Greek par­lia­ment adopted the EU’s Bank Re­cov­ery and Res­o­lu­tion Di­rec­tive (BRRD) which spells how author­i­ties can deal with fail­ing banks. This in­cludes “bail-ins” un­der which de­pos­i­tors can be forced to con­trib­ute to a res­cue so the bur­den does not fall on taxpayers, as was the case in the bailouts of the 2008-2009 cri­sis.

“There will have to be a race against time to wrap up the re­cap­i­tal­i­sa­tion by the end of this year. If it is done in 2016, when the BRRD di­rec­tive goes into full ef­fect, there could be a risk for large de­pos­i­tors,” the bank­ing source said. “Com­plet­ing it this year ef­fec­tively avoids a bail-in of de­pos­i­tors.”

Un­se­cured de­pos­i­tors with more than EUR 100,000 in their ac­counts will be spared if the re­cap­i­tal­i­sa­tion goes through this year. How­ever, share­hold­ers will be hit along with other in­vestors hold­ing ju­nior debt be­fore ei­ther the Euro­pean Sta­bil­ity Mech­a­nism or the HFSF in­jects the new money.

Fi­nance Min­is­ter Eu­clid Tsakalo­tos in­ter­na­tional lenders also wanted re­cap­i­tal­i­sa­tion by the end of the year.

ECB Gov­ern­ing Coun­cil mem­ber Chris­tian Noyer has said he op­poses ask­ing ma­jor de­pos­i­tors to con­trib­ute to the re­cap­i­tal­i­sa­tion - as was the case with the bail-in of banks in Cyprus in 2013 - since most of them in Greece are small and medium-sized en­ter­prises.

Bankers say de­pos­i­tors in Greece most fear Cypriot-style “hair­cuts”, along with a re­turn to the drachma na­tional cur­rency. But once the re­cap­i­tal­i­sa­tion is com­plete and the euro zone had agreed a new bailout for the Greek gov­ern­ment, de­pos­i­tors will be re­as­sured and cap­i­tal con­trols can be lifted.

“For as long as banks re­main un­der­cap­i­talised, cap­i­tal con­trols can­not be lifted and this is a main is­sue for de­pos­i­tors,” the bank­ing source said. “The sooner this ends, the bet­ter.” said to this week the com­plete the

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