It has long been a common secret that the locomotive of the economy, the banking sector, suffers, in addition to its other structural problems, from a constant lack of “fuel”. The main reason for this is the disproportionately high cost (management and capital) of non-performing loans (NPLs), which systematically burdens the relevant balance sheets.
The long-standing demand of the productive forces of the economy is nothing more than to liberalize the industry in order to effectively perform its mediating role by finally granting loans to healthy businesses and households, adequately supplying the necessary sustainable development. With this in mind, the Financial Stability Fund (shareholder of the four systemic banks) has thoroughly considered since the end of 2017 a number of alternative ways for credit institutions to relieve their troubled assets.
The main criteria for selecting the appropriate solution were their derecognition from the balance sheet, the zero burden of risk-weighted assets from the high-grade bonds that the bank may hold and, most importantly, the minimization of the impact of
their divested assets. The scheme to be chosen also had to have serious chances of being approved by the competent EU institutions. and the ECB (Directorate-General for Competition –DG Comp– of the European Commission and the Single Supervisory Mechanism – SSM) to make it applicable and relatively immediately enforceable.
More or less all the above required characteristics were met by the MEA securitization program (non-performing exposures) implemented in Italy since 2016, guaranteed by the State (known locally as GACS). This program from its initial implementation until the end of 2018 contributed to the drastic reduction of the MEAs of Italian banks by approximately 46 billion euros. With its appropriate adjustments to the market characteristics and the needs of the domestic credit institutions, the HFSF proposed in November 2018 to YPOIK and presented to the banks a complete and costed state guarantee program of assets with securitization (Hellenic Asset Protection Scheme) designed and fully adapted to the conditions of the domestic financial market.
Participation in the program is voluntary, enabling credit institutions to transfer MES portfolios to suitable special purpose vehicles (the price must be determined in free market terms) which will finance the purchase of MES through the issuance of three bond classes (different regarding the repayment priority), while the collection management of the portfolios will be assigned to independent, specialized receivables management companies (of Law 4354/2015). Achieving the derecognition of the transferred assets requires the sale of a sufficient number of bonds to third party investors (with market valuations) while the State will guarantee, obviously receiving the corresponding price (risk premium in the form of a coupon),
A key element of the above structure is the achievement of the “minimum required” rating level from the bonds of the highest order. Given that the credit rating of the Greek State is not classified at levels similar to that of Italy (ie it is not even in the investment grade at the moment), which affects the rating of any domestic organization / issue, it is necessary to emphasize a number of internal factors of the scheme that have a decisive impact on the formation of the final rating stage of the bonds. To shorten, as much as possible, the time required for the liquidation of any collateral (real or not) including real estate auctions, the optimization of the collection efficiency of the management companies,
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The implementation of this solution offers a number of significant advantages to the credit institutions that will choose to participate. The drastic reduction of the ACE ratio, the limited impact of the reduction of ACEs on their regulatory capital (compared to other solutions such as the already implemented portfolio sales), the possibility of holding high-grade bonds with zero impact on risk-weighted assets, the possibility of Some of the lower rated bonds, aiming at a future benefit from better management of the liquidation of transferred assets by specialized companies, as well as the improvement of real estate market conditions and valuations, are some of them. Banks are exempt from the MES loop, they will de facto focus on fulfilling their crucial mediating role, namely on providing sound credit and liquidity to individuals and businesses of all kinds. In addition to those already mentioned, the implementation of the proposed scheme will contribute to the further development of the NIS market while creating the conditions for the development of an active secondary market for the specific portfolios.
In addition to the particular importance and extent of benefits that the reduction of NPLs will bring to the economy, the soonest possible implementation of this HFSF proposal is expected to have additional significant advantages not only for the banks but also for the Greek State. Providing a guarantee in such a scheme seems to be the best alternative for the use of the limited available resources of the state budget, as it can multiply the reduction of NPLs in the system since, under certain conditions, it can relieve the banks for three times or even four times the amount of the guarantee (ie for every 1 billion euros of guarantee the system can get rid of 3-4 billion euros of MEA), consolidating the portfolios and consequently their balance sheets.
The structural elements of the solution proposed by the HFSF will be examined by DG Comp in order to decide competently whether the proposed scheme is compatible with the provisions of the European Commission on State Aid, ensuring that the price (ie the coupon) will be received by the Greek State to provide a guarantee will be reasonable, fair and in market conditions. It is estimated that the possibility of forfeiture of the State guarantee is limited (given the quality of the underlying securities to which it will be addressed), as well as its possible budgetary implications.
Having already broken the barrier of a decade in crisis and (real) recession, businesses, citizens, banks and the national economy in general seem to have long ago exhausted their resilience at every level. The proposals of both the HFSF discussed above and the BoG (a very interesting and radical solution aimed primarily at utilizing deferred tax credits – Deferred Tax Credits to drastically reduce NPLs) are undoubtedly two of the few available (perhaps unique) workable solutions that happen to be in every way complementary. It is, without the slightest doubt, in the interest of the country to make the most of it as soon as possible.
- Mr. Elias E. Xirouchakis is a member of the executive committee of the Financial Stability Fund, representative of the Bank of Greece in the Fund.