By Yiannis Papadoyiannis

According to the draft of the new memorandum of understanding that Athens is about to sign with its creditors, local banks have until April to draw private funds and complete their recapitalization. It also provides for the division of Hellenic Postbank into a “good” bank and a “bad” bank -- with the good one to be sold to another lender by the end of November -- as well as for the sale of the new Proton Bank.

The draft memorandum foresees the recapitalization of the local credit sector’s major banks in three stages.

First, the Hellenic Financial Stability Fund (HFSF) will provide the banks with access to all their capital requirements until the end of the recapitalization process so that they have a capital adequacy ratio of at least 9 percent, as required by the regulators; second, the HFSF will be responsible for providing all the financial tools required by the lenders until the end of January; and third, share capital increases must be completed by the end of April and any shares not covered by the private sector will have to be covered by the HFSF with the issue of common shares.

The plan is for private shareholders, whether current or new, to retain administrative control of the systemically important banks -- National-Eurobank, Alpha and Piraeus -- provided that they comply with the legal and auditing requirements and that they contribute at least 10 percent of the new common shares to be issued. Along with the reduction of the stakes of old shareholders in the context of recapitalizations, both the old and any new shareholders will reserve the right to participate in new increases, and provided they have paid at least 10 percent of the capital they will retain the right to buy back the shares that the HFSF will acquire for the next five years.

The resolution of the problem of banks with capital inadequacies must be completed by mid-June 2013 along with the framework for the management of the assets to be liquidated. Hellenic Postbank is seen going down the same road as ATEbank, with its immediate split into a “good” bank and a “bad” bank, while the transfer of the healthy part to another lender should be completed by end-November. The merger of the new Proton (currently under the control of the HFSF) with one of the major lenders or another party that might be interested should be conducted through an open process by mid-May 2013. As for the other non-systemic banks with a need for capital, if their stakeholders fail to respond to their capital requirements by end-April 2013 they will also be split into “good” and “bad” parts and either be given to one of the major lenders or come under the temporary control of the HFSF.

The memorandum further suggests that, under the direction of the European Commission, independent auditing firms will monitor the application and compliance of the lenders with the restructuring programs they will submit to European authorities. Emphasis will also be placed on the efficient implementation of corporate governance regulations.

According to the new memorandum, the legal framework concerning overindebted households will be revised in a bid to tackle the actual problems while preventing the weakening of banks’ solvency and the creation of a culture for forfeiting obligations. A more efficient institutional framework will be set up with the technical support of foreign experts so as to contain the moral risk and rule out the abuse of favorable measures by borrowers who are not really in need.