In his recent annual report on the economy, Bank of Greece governor Nicholas Garganas drew attention to the influence of fast credit expansion on commercial banks’ credit risk. Banks have achieved a marked improvement in the quality of their loan portfolios over the last three years, while provisions to cover loans that are non-performing for more than a year was raised from 43.9 percent in 1999 to 67.4 percent in 2001. However, according to the central bank’s data, there was a marginal rise in loan repayments that had been overdue for more than three months and a fall in provision cover for them in the first half of 2002. This is seen as directly related to the fast pace of credit expansion, particularly as regards mortgages, whose annual growth rate shot up to more than 35 percent over the last two years. Delayed mortgage repayments rose 13.3 percent in the first half of 2002, while for all loans, it was 3.4 percent. It is noted, however, that a significant part of delays concerned repair loans, which are largely considered to be consumer loans. The Bank of Greece last year raised the minimum provision rates for loans required by commercial banks for overseeing purposes, taking into account the above developments and two other important factors. These are a fall in these banks’ capital adequacy indicators and the repercussions of the severe stock market downturn on the value of shares put up as collateral security for loans. According to Garganas’s report, policies by the Bank of Greece and by commercial banks themselves led to a net 6.4 percent rise in provisions in 2002. Net delayed payments, that is, delays after the deduction of provisions, fell further, partly due to the Agricultural Bank’s (ATE) reassessment of its debt repayments schedule, bringing it more in tune with the farm production cycle to which it is largely exposed. In fact, ATE transferred overdue repayments for non-performing loans worth about 1 billion euros to an «open-ended» repayment schedule. Any shortfall in provisions set by banks from the minimum required by the central bank is deducted from equity capital and exercises an negative impact on their capital adequacy indicator, which fell from 0.51 percent in 2001 to 0.22 in 2001. A reading of the above would give the impression that, on the whole, things are well under control. The Bank of Greece report, however, shows greater concern for the problems arising from the so-called «share-loans,» generously granted by banks for the purchase of shares during the stock market frenzy of 1999. It notes, for instance, that due to the prevailing uncertain economic climate and the fact that many such loans have effectively stopped being repaid – although banks continue accounting for them as delayed – a speedier adjustment of provisions is required for them. To meet the problem, the central bank said it conducted case-by-case evaluations and suggested additional provisions, or a raising of the capital adequacy indicator above the 8 percent minimum, after probing loan portfolios. But seeming to have adopted the carrot-and-stick tactic, the Bank of Greece says that while recognizing the value of collateral securities in reducing credit risk and taking into account the negative impact of provisions on bank performance, it will examine the possibility of allowing the deduction of the value of certain categories of tangible collateral from delayed repayments, thus reducing their size. It also intends to readjust the minimum provision rates for the remaining sums after re-evaluating their quality and the possibility for liquidating various categories of collateral. In other words, the aim of such an overall re-evaluation is to enable banks not to list as delayed repayments loans which are adequately covered. The result will be a reduction in bank provisions and greater leeway for entrepreneurs, who will be given more favorable terms in repaying their loans. The liquidity problems that banks have encountered, and which have created the need for the Bank of Greece’s initiatives, make perfectly understandable why they have been making haste to issue bond loans and why they are anxious to improve their capital adequacy indicators when these are above the required 8 percent minimum. It also explains why they are promoting syndicated corporate loans and directing enterprises to new types of credit for securing liquidity, such as through leasing of large real estate. Perhaps a clearer picture of the problem would be at hand had the Bank of Greece provided full data on the evolution of the performance of equity capital and debt ratios for the private sector as a whole. One available indicator is that the debt-to-equity ratio fell from 12 percent in 2001 to 11.5 percent in 2002, but remained high compared to the 0.65 percent average for the period from 1997 to 2001 for all commercial and industrial enterprises listed as societes anonymes or of limited liability.