Press Release 08/06/2016 - Speech by Bank of Greece Governor Y. Stournaras at the American School of Classical Studies in Athens: “The impact of the Greek sovereign crisis on the banking sector: challenges to financial stability and policy responses by the Bank of Greece”
Speaker: Yannis Stournaras
London Business School Greek Alumni Association and Stanford Club of Greece Event titled "Breaking the Bottlenecks - Steps towards Sustainable Growth" at The American School of Classical Studies in Athens 8 June 2016 Yannis Stournaras Governor, Bank of Greece
Keynote speech The impact of the Greek sovereign crisis on the banking sector: challenges to
financial stability and policy responses by the Bank of Greece
Ladies and gentlemen,
It is a great pleasure to be here today and have the chance to share with you my thoughts on the impact of the Greek sovereign crisis on the Greek banking sector, outlining the challenges to financial stability and the policy initiatives taken primarily, but not only, by the Bank of Greece. At the outset, it is important to highlight that financial stability is a necessary condition for achieving the goals of prosperity and sustainable growth. That these goals are shared by all is amply reflected in the current mandates of central banks with their emphasis on price stability, support for the general economic environment and, more recently, the safeguarding of financial stability.
I will begin by briefly outlining the global landscape on which the effort to safeguard financial stability has been taking place. Then, I will discuss developments in the Greek banking sector. In particular, emphasis will be placed on: (i) first, the significant worsening of the macroeconomic environment and the subsequent deterioration of Greek banks’ fundamentals, in general, and their asset quality, in particular; (ii) second, euro area monetary policy initiatives and their limited impact on Greece; (iii) third, the new role for the Bank of Greece that stems from its mandate that has been revised to address the current challenges. Finally, I conclude by outlining the challenges ahead and providing some thoughts on the way forward.
| A. The setting – a broader context Over the last seven years, the European Union has faced a series of unprecedented challenges; challenges that have tested the international financial system and the coherence and stability of the Union. The response to these challenges has shown that the EU is built upon solid ground as the bonds among Member States have become ever stronger. The global financial crisis, triggered in 2008, provided a first challenge to stability and raised major issues related to “too-big–to-fail”, “too-big-to-save” or “too-complex-to-resolve”. The euro area sovereign debt crisis rapidly followed and real economic activity deteriorated considerably in certain parts of the euro area. A key lesson of that crisis has been that the establishment of a banking union is a vital prerequisite to make a monetary union sustainable. More recently, with the recovery in the euro area still fragile, new geopolitical tensions have led to an unprecedented refugee crisis and increased uncertainty. Finally, matters such as the probability of Brexit, different approaches among Member States regarding banking union and the slow progress in establishing a single European deposit insurance scheme, have been hindering further progress towards securing a financial system architecture appropriate to ensure stability. B. The sovereign crisis in Greece caused the Greek banking sector crisis Unlike other recent experience with financial instability, the origins of the Greek crisis were not to be found in the banking sector. In the context of the unfavorable international economic and financial landscape that I outlined above, Greece has been undergoing a serious sovereign crisis that has required three adjustment programmes, including, inter alia, substantial reforms and tough austerity measures. The rapid deterioration in the macroeconomic environment, reflected in a cumulative loss of more than 25% of the GDP, has shown that the crisis facing Greece is both deeper and more protracted than initially expected. In terms of the overall deterioration of key macroeconomic aggregates and the duration of the crisis, one could say that the Greek crisis has proved to be more severe than even the Great Depression. At the outset, the deterioration in the macroeconomic environment, sovereign debt downgrades and rising sovereign spreads rendered access to international capital and money markets impossible for both the banks and the sovereign. Extremely tight liquidity conditions ensued and pressures on the banking sector grew. In this adverse macroeconomic landscape, unemployment increased to historic (post-war) levels, and disposable income dropped substantially. As a consequence, the adverse developments in the banking sector were unprecedented; in particular, Greek banks’ fundamentals and asset quality ratios deteriorated substantially. The extent of the deterioration may be described in terms of the impact of the restructuring of Greek government bonds held by the private sector (the so-called Private Sector Involvement or PSI): Greek banks suffered losses of about €38 billion in 2011, about 170% of their total Core Tier I (CT1) capital at that time. Due to the liquidity squeeze, the intermediary role of banks has been undermined and the channels for financing the real economy have been restricted. In addition, deposits declined by €117 billion (i.e. a drop of -44%) between September 2009 and December 2015. Mainly, this decline reflected depositor uncertainty regarding the prospects of Greece within the euro area. But additionally, the decline in deposits reflects the negative loan growth throughout the period. In normal times, deposits do not just create loans, but loans also create deposits via the money multiplier; declines in loans analogously lead to endogenous declines in deposits. The significant deleveraging that Greek banks have undertaken – between end-2010 and end-2015, loans to the private sector fell by €54 billion – was partly a response to tight funding conditions and partly a consequence of the need to set aside more capital since the potential for unexpected risks rose considerably. As a consequence it became ever more difficult for banks to play their natural role, that of financing the real economy. The considerable decline in household disposable income, a consequence of both wage cuts and the rise in unemployment, resulted in a significant increase of non-performing loans and impairments, thus undermining the prospects for bank profits. Banks from 2010 onwards began to experience losses, which eroded their capital base. Despite efforts to support profitability by reducing costs, the high level of loan loss provisions resulted in a series of loss-making results right up until the first quarter of 2016. Read here the full REPORT page source http://www.bankofgreece.gr/ |
