Unprecedented moves shield banks from pandemic

Greek banks, along with their European peers, have been provided with unprecedented support that covers crucial areas in order to cope with the economic shock brought about by the coronavirus.

The European Central Bank has fully shielded the banking system in terms of liquidity, bad loans, and capital adequacy, while the European Commission has suspended several regulations to prevent any additional state aid measures from having an impact on shareholders, bondholders, and depositors.

Greek bank shares, despite yesterday's gains of 17.84 percent, may have plummeted 60 percent since the beginning of the year, but the current crisis for Greek lenders is very different from what we have experienced in recent years.

Greek banks were recapitalized three times between 2012 and 2015. On two of those occasions, the share capital hikes led to the financial ruin of the previous shareholders. The recapitalizations were required as a result of the losses imposed by the PSI bond swap and the shrinking Greek economy that resulted in a large spike in non-performing loans, hitting bank capital levels. Thus, the capital boosts either led to banks being nationalized or to new shareholders (who put up the fresh capital) taking control of the banks from the previous shareholders.

ECB moves

However, this time around, the bank crisis is radically different: it is not due to bad loans and the weak state of the economy but due to the outbreak of a lethal global epidemic that has taken grip of the international economy.

In order to address this unprecedented situation, the regulator, the ECB, has provided immense assistance in supporting banks on three critical fronts:

Liquidity. The ECB has enabled banks to raise as much liquidity as they need through the TLRO III refinancing program, with very attractive terms for 12 months. With this immense liquidity injection, banks will be able to finance businesses and households. At the same time, the ECB has decided to move ahead with a 120 billion euro asset purchase program (APP) by the end of the year. Finally, in an effort to ease the economic pain from the epidemic, the ECB is implementing a one-off 750 billion government bond purchase program, including Greek government bonds.

Bad loans. The ECB has radically changed the rules governing non-performing credit exposures, enabling banks to refinance any loans that would be difficult to service due to the epidemic and prevent them from turning sour. This is a very important step as it ensures that the problems created by the downturn will not weigh on bank capital levels.

And finally, the ECB went one step further, giving more breathing space to banks by reducing capital adequacy ratios. The minimum capital adequacy ratio has been cut to 11.5 percent from 16 percent previously.

These measures provide support to banks on liquidity, non-performing loans, and capital adequacy without any impact on shareholders in a bid to handle an extreme, exogenous situation.

There is no question of banks being nationalized, which, either way, would require the consent of the SSM. The plan put together by authorities aims at providing banks with all the help needed to cope with the extreme conditions and quickly return to normal once the epidemic is controlled.

Almost all forecasts project that economies will be hit by a large short-term shock but that the epidemic will be controlled and a strong recovery will soon follow. This was the case in China, which, after a brief shock, is gradually returning to normal.

The big risk, not just for banks, but for all our businesses, is if countries fail to effectively deal with the epidemic, if the lockdown is prolonged for many months, and if international trade and the economy collapse leading to an abrupt change of the status quo worldwide.

The biggest concerns for Greek banks is whether a new wave of "refuse to pay" loan holders emerge from the current situation (creating a new generation of bad loans), while also failing to adequately deal with the existing stock of non-performing loans.