ECONOMY

Banks need to strengthen their capital bases

The Bank of Greece (BoG) is proceeding to the recapitalization of commercial banks in association with the country?s creditors.

In association with an independent body, BoG will perform a study on the quality of the banks? loan portfolios and the adequacy of their provisions, as well as imposing an increase in the Core Tier 1 ratios of basic capital by the end of 2012 at the latest.

Sources suggest that the central bank will follow the Portuguese model, whereby banks were asked to raise their Core Tier 1 ratio by 10 percent before the end of 2012.

Technocrats representing Greece?s international creditors, known as the troika, note that it would be best if local banks drew their required capital from shareholders through capital increases, but if that is not possible then they should join the European Financial Stability Facility (EFSF).

Bob Traa, the representative of the International Monetary Fund in Greece, told a Financial Times banking conference in Athens on Tuesday that Greek banks remain resistant to pressure but will need to strengthen their capital bases.

After raising their Core Tier 1 ratio, local lenders will need to improve in other areas in order to become independent of European Central Bank funding by regaining the trust of the interbank market. Foreigners believe that banks? financial reports do not portray the truth as they contain toxic elements (Greek state bonds), while there are also doubts about the quality of loan portfolios.

Once the BoG study is complete, the extent of the exposure to state bonds will be publicized so as to respond to another major worry of foreign investors.