GREECE: An Introduction to Banking & Finance

Economic Overview 

As a result of the debt sovereign crisis during the past 12 years (2008-2020) the Greek political, economical and social environment has changed dramatically. On the political front, the Greek socialist party almost “vanished” from the map with the strengthening and eventually the rise in power of the radical left party SYRIZA in the period 2015-2019. From the mainstream political parties of the pre-crisis era, the conservative party managed to bounce back and take power in the last parliamentary elections, which took place in July 2019.

In 2008 Greece’s GDP was €241.9 billion, dropping at its lowest in 2016 (€176.48 billion) and then slowly recovering the following couple of years, reaching €192.74 billion in 2019. In addition, during the crisis 488,000 jobs were lost and approximately 500,000 Greeks fled the country.

The economic situation started to ameliorate substantially from 2019 when the year ended with a growth rate of 1.9%. For 2020 the European Commission predicted that growth would be at 2.4% driven by the improved economic climate (resulting mainly from political stability), expansion of the employment market, increased exports, reduction of taxes, tourism and EU subsidies. To this effect, tax relief measures of €1.2 billion have been legislated, while social security contributions shall be reduced by up to 5% during the period from 2019 to 2023.

Unemployment rate in December 2019 fell to 16.3% from 18% in December 2018. At the same time, a historical high of the past 13 years (just before the crisis) was recorded in the economic climate index.

However, Greece has not remained unaffected by the recent pandemic and, thus, the predictions for the Greek economy for 2020 are currently outdated and its outlook is uncertain. The imposed restrictive measures in the economic and social activities in order to combat the spreading of coronavirus have started to create pressure and unfavourable consequences in the global economy and, subsequently, in the Greek economy. Within this context the state budget for the year 2020, as voted by the Hellenic Parliament in December 2019, cannot be executed as such. A supplement budget was therefore legislated in March 2020, increasing by €5 billion the appropriations in actions relevant to the protection of public health to combat the pandemic. Further revisions of the budget are also expected. In addition, according to OECD predictions there could be an up to 34% reduction in Greece’s GDP, since the closure of enterprises and restrictions in movement are expected to have a significant impact in the level of production, household expenditure, investments and commerce. Finally, under current estimations the 2020 fiscal year could end with a 4% recession. There cannot be a safe prediction with regard to the Greek economy’s final outlook of the year, since this depends on the duration of the restrictive measures and the economic and business climate when the country returns to normality.

Banking and Finance during the past decade 

During the decade from 2008 until 2018, when the country’s situation somewhat commenced to ameliorate, the banking system has undergone several changes as a result of:

• deteriorating fiscal conditions;
• uncertainty regarding Greece’s continued participation in the Eurozone;
• the restructuring of the public debt through the participation of the private sector;
• the inability to access international markets and the significant outflow of deposits;
• the deteriorating quality of loan portfolios held by Greek banks; and
• the downgrading of credit ratings of the Hellenic Republic and, consequently, of Greek banks.

The banking sector during this crisis decade (2008-2018) was hit hard. Deposits dropped from €280 billion in 2008, to €183 billion in 2018. In the same period, non-performing exposures (NPEs) increased by approximately six times, from €14.6 billion to €88.6 billion. Likewise, the number of banks' FTEs during the period 2008-2018 decreased from 67,800 to 40,790 and branches from 4,130 to 1,946.

Within this context, Greek banks have been subject to recapitalization and implementation of relevant restructuring plans. Currently, the most immediate challenge faced by banks is to continue the acceleration of the reduction of their NPEs, while ensuring minimum impact from such activities in their capital and disengagement from non-banking activities through the disposal of stakes in companies outside the financial sector.

The Greek banking system has also been affected by the Capital Controls Regime, which was enacted from July 2015 until the end of August 2019. The restrictions in banking transactions and the prohibition of cross-border free transfer of monies created operational hurdles and deterioration of the financial results of banks. The complete cancellation of capital controls was the result of the progress achieved by banks regarding the reduction of NPEs and the return of the majority of the deposits that were withdrawn during the six-month period between December 2014 and July 2015, when capital controls were imposed.

Emerging trends in Banking and Regulation 

Trying to overcome the financial difficulties of previous years, Greek banks are facing the challenges below in the period 2020-2021:

• The reduction of NPEs from bank portfolios – according to the bank plans shared with the SSM for 2019 to 2021, NPEs must be reduced by €55 billion;
• In the context of the NPEs reduction objective, the Hercules Asset Protection Scheme (HAPS), a plan similar to Italy’s Garanzia sulla Cartolarizzazione delle Sofferenze model, was legislated in December 2019 by the Greek Parliament (Law 4649/2019). The HAPS provides for a Greek Government guarantee against consideration for the benefit of holders of the most senior class of asset-backed securities issued by securitization special purpose vehicles, in the context of transactions involving the disposal of non-performing loans originated by Greek banks. The HAPS aims to facilitate raising resources in the context of securitization transactions and make this funding option more attractive for third-party investors. It is a scheme that is expected to clean up around €30 billion of bad loans from the banks' balance sheets;
• The adoption of the CRR II package – the wide-ranging changes to the existing capital requirements and resolution framework will have a significant effect on banks in the European Union, including the risk modelling, funding structure and reporting systems;
• The implementation of the new Anti-Money Laundering Legislation (EU Directives 2015/849 and 2018/843) – the Bank of Greece (BoG) is currently reviewing the amendment of the relevant regulatory act (BoG Act 281/2009) in light of the new legislation and the imposition of additional obligations in banks, including new provisions with respect to customers' digital on-boarding;
• The implementation of Regulation (EU) No. 2016/679 (General Data Protection Regulation) – in view of the recent Law No. 4624/2019 regulating certain aspects of data protection, as well as bank digitalization initiatives, this is one of the main challenges that banks face in terms of compliance and infrastructure;
• The implementation of PSD II – the new legislation opens payments to new entrants, which would reduce costs and be more effective, thus changing the traditional banking model, which would have to invest in new technologies and enhanced cooperation, competition and security measures;
• The transformation from the conventional banking model to digital banking and the use of new technologies including Artificial Intelligence (AI). In this area the reliance in cloud computing, application programming interfaces (API) and similar IT technologies would increase cyber-risk and, subsequently, banks’ investments to protect their systems and clients;
• The electronic retrieval of banks' customers' (both individuals and corporates) KYC data and documents directly from Public Authorities within the context of the digital transformation of the Greek Public Administration; and
• The enactment of new corporate governance rules for companies in the form of sociétés anonymes, with securities listed or applied to be listed in an organized regulated market operating in Greece.