Government versus banks: Unprecedented attack, Institutions - investors' concern

The conflict between the government and the banks is taking on unprecedented dimensions, with the government launching an all-out attack on the credit institutions, dictating changes in their entire pricing and credit policy.

In an interventionism reminiscent of other times, when the banking system was under the shackles of stifling state regulation decades ago, the government is escalating the conflict, demanding changes across the entire spectrum of banking operations: from how they set interest rates to their fees and credit policies.

The issue was given even greater dimensions by the public intervention of the Prime Minister, Kyriakos Mitsotakis, who, during his meeting with the President of the Republic, Katerina Sakellaropoulou, asked banks to take their responsibilities given their high profitability.

Mitsotakis' statements followed the crescendo of Finance Minister Christos Staikouras, who gave banks a few days' leeway to proceed with the implementation of a support programme for up-to-date vulnerable borrowers, to achieve an increase in the approval rate of out-of-court applications (again for up-to-date borrowers), to increase deposit rates and reduce loan rates, as well as to reduce the cost of commissions for 12 banking operations, which, according to the Ministry of Finance, 'impose a significant burden on Greek society'.

This is an unusual intervention: it is obviously not the job of the Finance Minister to dictate the level of interest rates or the level of commissions to a bank. It is the job of the state to ensure the proper functioning of the market through institutions, creating the right conditions for competition to develop and imposing sanctions where problems and bad practices are found. 

Even more aggressive rhetoric is being pursued by the official opposition, with SYRIZA president Alexis Tsipras calling for a tax on banks, legislation for borrowers and changes to interest rates, with the two main parties seemingly in a bidding war. 

Business Daily reports that both the European Stability Mechanism (ESM) and the European Central Bank's Single Supervisory Mechanism (SSM) have been alarmed by the interventions and are expected to contact both parties in the coming days to assess the situation.

Systemic banks have been embarrassed and frustrated by the situation that has developed, citing demands that betray ignorance of basic supervisory rules, arguments that are not based on economic logic and options that go against central government strategies, such as the consolidation and stability of the banking system, attracting investment capital, selling HFSF bank shares to investors and regaining investment grade status. At the same time, they note with dismay the continued targeting of the industry.

Moreover, they warn of the risk of reversing the positive trend in the sector and creating a new generation of 'red' loans, losing the benefits of the long and difficult period of consolidation. It is noted that the banks have 14 years to distribute dividends to their shareholders, while the drastic reduction of NPLs over the last three years has required major new capital increases carried out by all systemic banks either directly or indirectly.

The intervention of Mitsotakis and the "plunge" in ASE

The Prime Minister's intervention last Friday, coupled with Mr. Staikouras' anti-bank rhetoric, caused investors to be puzzled and a hammering on the stock market followed, with bank shares "plunging" by -3.9%, the biggest daily drop in the last four months.

Just 24 hours before, Kyriakos Mitsotakis had been at the Investment Conference of ASE and Morgan Stanley, where he referred to the great progress of the domestic economy, the consolidation of banks, and denied the imposition of an extraordinary tax, reassuring the markets.
Financial analysts point to this contradictory picture and the pursuit of conflicting objectives: promoting the investment agenda abroad, while at the same time to the domestic public the government appears as a persecutor of the banks, asking the managements to take actions that undermine their asset quality and profitability. This contradiction has provoked several ironic comments and parallels with the contradictions of the "negotiation" of the first half of 2015.

At the same time, they directly link the fall of the ASE, with bank shares under the strongest pressure, to Mitsotakis' statements and the constant references to the high profitability of the industry and the need to take actions that undermine their payment culture and profitability.

It should be noted that the continuous recapitalisations of banks were not only the result of the PSI and the bond haircut. The collapse of the payment culture (Katseli law, suspension of auctions, etc.) caused a disproportionate increase in non-performing loans, which, combined with the political instrumentalisation of 'red' loans and the failure to address them, led to the destabilisation of the banking system, loss of confidence and successive recapitalisations. It took many years, large amounts of capital and a lot of energy to get the banks back on track in 2020-2021, even though they are still far from European standards.

Government demands and inconvenient data

The government has asked banks - and even in the form of a promissory note - to increase deposit rates, reduce loan rates (with Chr. Staikouras to characterise the current difference between lending and deposit rates as unacceptable), to reduce expensive commissions, to allow up-to-date borrowers to join the out-of-court system and to provide facilities to vulnerable adult borrowers.

The Finance Minister calls for all of the above to be done by the banks, taking advantage of their high profitability, which will reach €3.5 billion this year.

According to banks soucres:

• Profitability - extraordinary tax: the €3.5 billion profit this year comes after losses of €4.6 billion suffered by banks in 2021, preceded by even larger losses in previous years, as a result of the unacceptable level of non-performing loans. In fact, the 2022 profits are much smaller, as half of them are profits from non-banking activities, namely financial operations. In addition, much of the financial profits are theoretical, as they come from bonds with the positive impact on profitability being offset by the impact on capital due to rising bond yields. The talk of imposing a one-off tax lacks economic rationale given that over half of banks' capital is tax deferred and any additional tax would immediately lead to the need to raise capital as domestic banks are at the Pillar 2 minimum capital adequacy (P2G) threshold. Note that domestic banks receive low scores in the ECB's supervisory ratings with profitability (and the absence of a sustainable profitability model) being a key weakness. Bank executives point out that increased profitability is necessary both to further reduce NPEs to bring them in line with the European average, and to provide the necessary 'fat' to address loan servicing problems. The low profitability and efficiency of banks is also reflected in the stock market, with shares in the sector trading at levels significantly below their book value.
• Assistance scheme for vulnerable defaulting borrowers. As banking and supervisory sources point out, any change in the contract between a bank and a borrower that causes a reduction in the present value of the borrower's liabilities, which the government requires banks to do, automatically leads, under the ECB's supervisory rules, to a change in the loan category to NPE. In other words, if there are changes to up-to-date loans of EUR 2 or 4 or 8 billion, changes that lead to a reduction in the present value of the debtor's liabilities, then these will move to the NPL category, burdening banks with additional provisions. As they note, Greek banks have not yet completed the effort to reduce NPEs and a generalised regulation would lead to an automatic increase in NPEs, undermining the progress that has been made.
• Commissions. The finance minister, speaking on SKAI television last Saturday, noted that "banks are charging Greek citizens too much and not paying them what they should. I asked them to evaluate within 10 days 12 specific commissions." However, the contribution of commissions to the profitability of domestic banks remains well below European data, and 80% of commission income in Greece is on commissions from transactions with businesses, not individuals. It is true that the level of commissions on core banking operations in Greece is high, but this is due to the fact that a large part of banking operations, especially to individuals, are provided free of charge. Unlike in other EU countries, in Greece there are no charges for holding a bank account. It should be noted that in the UK there are charges even for student accounts. The Competition Commission has carried out an extensive audit on the issue of supplies in 2019 without yet having published its findings.
• Interest rate divergence. The sharp rise in the euro base rate in recent months has created a large spread between deposit rates (the average rate on new deposits is 0.05%) and loan rates (the average rate on new loans is 4.86%). It is assumed that banks will also increase deposit rates, but these will be small, due to the excess liquidity in the economy. The main problem for banks is the difficulty of converting deposits into repayable loans which means that they have no incentive to pay higher interest rates. In addition, it is clear that the excessive concentration of the industry, as a result of the great crisis that preceded it, is not conducive to competition. Moreover, that the high lending rates in Greece compared to the European ones reflect two particular domestic characteristics: a) the higher interest rates were a survival option for banks in order to boost revenues and deal with the "mountain" of "red" loans and b) the structure of Greek entrepreneurship is characterised by many small firms, with a weak financial position, which are not able to raise liquidity on better terms. If these businesses were to attempt to borrow from a European bank, they would be charged a significantly higher interest rate than they obtain in Greece.

Regarding the Ministry of Finance's pressure on the possibility of including in the out-of-court system also adult borrowers, banks point out that this may have a serious impact on the payment culture, which, combined with the general noise about banks and the cultivation of expectations, may lead to a significant increase in non-performing loans.