New loan issues by local lenders will become harder from January as they must adhere to strict risk assessment criteria. Meanwhile Morgan Stanley has warned that the price Greek banks will pay for slashing their bad loans will be major reductions in their stock values.
A new act by the Bank of Greece, to implement the directives of the European Banking Authority on risk assessment and the recording of losses from loan issues, will force Greek banks to make exceptionally detailed assessments of the risks they take and to increase provisions for nonperforming exposures (NPEs).
The new loan issue criteria will need to become so much stricter, for instance, that upon assessing their risk banks will have to take into account a much broader range of information concerning historic data on loan forfeiting rates as well as forecasts for the future, weighing factors such as shifts in each corporate sector’s prospects, business activity growth rates, economic forecasts on interest rates, unemployment levels, basic commodity rates and even consumer psychology.
For individuals especially, banks will have to factor into their decisions the borrowers’ steady sources of income, their total exposure to borrowing, their incentives or willingness to fulfill their obligations, and possible changes to their collateral, among other things.
This forms part of the Greek banking system’s endeavor to avert a new generation of bad loans, given the huge effort it is making to rid itself of this major problem, which according to Morgan Stanley will continue to hurt banks’ capitalizations.
In a report issued on Wednesday, Morgan Stanley argued that the NPE targets for end-2021 will be met, but that this will greatly limit the prospects for banks’ returns: This means their stocks do not constitute an investment opportunity for those wishing to bet on the recovery of Greece through its credit sector.
Only the creation of a “bad bank” would see the optimistic NPE reduction scenario materialize, the report added, but a rapid reduction of NPEs to 10 percent would require new funds of 11.1 billion for the sector.