Liberalize home loans

Although few, if any, doubt the outcome of the war in Iraq, most analysts doubt whether the Athens Stock Exchange (ASE) will be able to finally match the «short war» relief rally put up by other European bourses. The underperformance of Greek stocks, coupled with a sharp correction in high-flying government bond markets, creates an unfavorable environment for Greek banks just a few days before the first quarter is to wrap up. This combination, along with a noticeable slowdown in lending growth and a rigid cost base, calls for Greek central bank authorities to speed up the full liberalization of Greek consumer credit and thus breathe life into home equity loans. As expected, the oversold Athens Stock Exchange has been unable to play catch-up with the other European bourses, which have rallied more than 15 percent in the last eight sessions or so. Even though the ASE’s general stock index succeeded in recording gains of 3.73 percent last week to close at 1,570.39 points on Friday, it underperformed again compared to the Pan-European Eurotop 300 index which managed to gain more than 7 percent last week and still trades well below last year’s close of 1,748 points. At the same time, Greek government bonds followed other major government bonds lower last week with the 10-year benchmark trading around 4.50 percent last night versus 4.44 percent on March 19 and 4.06 percent on March 12, meaning a good deal of prospective capital gains from bond portfolios have been wiped out. It is noted that bond prices and yields move inversely. Although some Greek banks have tried to take advantage of the European Central Bank’s decision to trim its intervention interest rate by 25 basis points on March 6 by widening further their deposit-loan rate spread and one, namely Alpha Bank, going against the tide by raising its consumer and mortgage lending rates, whatever benefits may be accrued will not be reaped before the second quarter. Moreover, a visible slowdown in loan volumes due to economic uncertainty may put a limit on them. Given their relatively inflexible cost base, banks seem resigned to look into ways to raise revenues and simply hope that the stock markets will recover in the meantime. Retail banking has been mentioned frequently as the venue to achieve high top-line growth and bankers along with analysts and government officials often refer to the tremendous potential of retail banking, pointing to Greece’s low consumer and mortgage loan-to-GDP ratios compared to much higher averages in other European Union countries. Few doubt this is true but one of the surest ways to at least partially unleash that potential requires that the central bank fully liberalizes consumer credit. The central bank has not proceeded with the full liberalization of consumer credit, citing concerns about the impact on inflation, household indebtedness and the lack of a fully operational credit bureau. Nevertheless, most analysts expect the final restrictions to be lifted in coming months. Although most analysts expect banks, eager to boost their revenues, to try to lend even to low credit quality individuals in return for higher interest rates, they readily admit that the real prize is elsewhere – in home equity loans. In a typical case, an individual would be able to take out a loan for different purposes, such as repaying an existing personal loan with a high interest rate, using his home to guarantee repayment. Home equity loans are very popular abroad, especially in the USA, but are not available, at least officially, in Greece, since local households are not yet allowed to take out a loan using their house as a guarantee, nor to use any proceeds for reasons other than repairs, home improvement and related purposes. Still, it is known that some individuals have taken out home improvement loans and used the proceeds for other purposes, such as the purchase of durable goods. Bankers say in private that they suspect that some individuals have not used the proceeds of the loans as intended, but argue that it is very difficult and very costly for the bank to check how the money has been used. The word in the local market is that at least one large bank has used it as a means of expanding quickly into the lucrative area of retail banking. Bankers say that home equity loans would have had a positive impact on banks’ results and would have helped lower financing costs for households. An individual who may have taken out a number of personal and other consumer loans from different banks with high interest rates would have been able to take out a home equity loan from a bank, consolidate the debt and pay a much lower interest rate as the house would have been used as a guarantee for repayment. From the bankers’ point of view, home equity loans carry a certain amount of collateral and are expected to reduce the number of non-performing loans and help improve the bank’s capital adequacy ratio at a time that capital is valuable. In addition, they say, they will be able to serve customers better because they will be able to devote more time and resources to each client. Of course, the evaluation of the creditworthiness of each customer will take center stage and this requires data on his credit history, good risk management systems and competent employees screening the clients. «Each client is going to be looked upon as an enterprise,» says the head of one major bank. Times are tough for many economies and corporations. Greek banks, like other European financial institutions, are no exception. With the ASE unable to follow the other bourses higher, capital gains from government bonds hit, an inflexible cost base and a slowdown in lending growth, the full liberalization of consumer credit seems to be the answer despite its risks. Within this context, home equity loans should spearhead the charge.