Warning on bank stability

BoG highlights the risks associated to the credit system's dependence on central government


The Bank of Greece warned on Thursday about the risk posed by the local banking system’s high dependence on the central government, which may lead to a sudden adjustment in security prices.

The central bank’s credit stability report showed that at the end of 2020, that dependence had come to 21.4% of all assets and 36.5% of the country’s gross domestic product, against 13.8% and 18.4% respectively in June 2018.

That is due to state bonds, which increased to 26.7 billion euros in 2020 from €16.4 billion in 2019, along with the collateral issued in the context of the program to streamline bank portfolios due to nonperforming loans, and deferred tax assets.

Given that banks’ share of Greek state debt is still high and the prices of bonds remain high too, ”a sudden adjustment of their rates due to an unforeseeable deterioration of macroeconomic data and the tightening of funding conditions could lead to an increase in fluctuation and a reduction in market liquidity,” the BoG noted.

Furthermore, the interconnection of banks with the central government through the deferred tax credits will also grow unless measures are taken. The reason for that is that the implementation of the securitizations aimed at relieving financial accounts from many NPLs requires capital to cover losses, which increases the share of tax obligations as a ratio of the banks’ assets.

The central bank particularly highlighted “the low quality of the capital of Greek banks, as in December 2020 the deferred tax credits amounted to €15.1 billion, representing 53% of all capital of the banks.”

On the other hand, the report records the considerable 31.1% reduction, or €21.3 billion, in total bad loans that banks have achieved in the last year, while conceding that the overall NPL remained at a high 30.1% at end-2020. The central bank underscored the need for a rapid and complete recording in banks’ financial accounts of the new NPLs stemming from the pandemic period.