Greek banks lag behind in credit risk management
More than a year and a half after the physical introduction of euro coins and notes, Greek banks, insurance firms and other corporations have done little to catch up with their EU counterparts in credit risk management, leaving themselves vulnerable to a future economic slowdown or other company specific events. Although few pay attention to the issue of credit risk management, it should be expected to be high on the agenda in the next few years as regulations and economic performance make it imperative in a more and more complex world of processes and financial instruments. Greek banks have been at the forefront of efforts to install credit risk management systems to be able to better assess the credit quality of their customers. Nevertheless, bankers who should be considered insiders because they work in credit risk management banking departments, describe a disappointing situation. Things are definitely much worse in the insurance sector, where credit risk is nominally an almost unknown word although this is the European sector which has paid much more attention to credit risk management in the last few years. Greek corporations, even the large ones, have not been convinced of its merits and prefer to be exposed to such risk rather than try to assess it and take measures to reduce it. Aris Protopapadakis, the CEO of Systemic Risk Management, a local firm specializing in credit risk management, agrees that with the notable exception of banks, everybody else – that is mutual funds, insurance companies and large corporations – have shown little interest so far in installing these systems, though a few seem to recognize the need for doing so. He says even some banks have been slow to understand that in addition to funding and operating costs, capital set aside for a loan has a cost which should be included in the calculation of the spread on a corporate loan. «Many bankers are happy when they lend at 4.50 percent and their funding cost is 2.25 percent. But in doing so they do not take into account the cost of capital required to be set aside and ignore the fact that shareholders expect a higher return on equity,» says Protopapadakis. Greek banks are known to offer the lowest spreads over Euribor on loans to their non-rated corporate customers just because they do not take this into account. As a result, non-rated and even some rated Greek companies borrow at more attractive spreads than their European counterparts, with much higher investment grade credit ratings. Some bankers have been more critical of their employers, saying financial institutions have spent a good deal of money on buying systems for assessing market risk, that is the impact of moves in interest rates and other variables on their securities portfolios, but lag behind in credit risk management. They say most local banks are happy to use the fixed weights for each loan category assigned by the central bank of Greece to calculate their capital adequacy ratio rather than engage in active credit risk management. «Some banks, even large ones, do not even have a comprehensive integrated system and just run some simple applications instead,» said a senior official at a medium-sized Greek bank. «National Bank is the only Greek bank which a few years ago acquired such a credit risk management system, a well-known Canadian system called Algorithmics, but it has never been fully operational.» Greek banks have access to a black list, called Teiresias, of bank clients who have defaulted on a past loan or written a bad check or had been taken to court for violating the terms of agreements signed. They have no access, however, to information regarding a customer’s credit history to help them assess his creditworthiness because large banks did not want until recently to share client information with smaller ones due to concerns they would lose a competitive advantage. Bowing to pressure from the Greek central bank, banks supposedly agreed to contribute relevant information on new loans to the database, called the «Teiresias white list,» ahead of the full liberalization of consumer credit this summer. Bankers in the know claim at least one large bank has not been as forthcoming as expected, raising concerns about the credibility and the time it will take to build this database. Lacking a formal credit rating bureau, some small and medium-sized banks have formed informal groups to exchange information about clients. It is known that a number of Greeks used to take out personal and consumer loans from different banks to overcome the amount limits per consumer loan set by the central bank. These limits have been lifted. Although a large reliable database along with the availability of large-scale credit risk management systems is considered essential in credit risk management, bankers consider the limited number of bank employees who are experts in the field equally important. «Basically, you need a team of experts who know the credit risk management system you put in place and can adjust it to take local needs into account. In my view, this can be done only with the help of banks from abroad who have used the system and know it,» said the banking official. Even if one ignores insurance companies and corporations and focuses on banks, the conclusion is that Greece lags behind in the implementation of credit risk management. Given Greek banks’ heavy reliance on net interest income from loans to boost earnings, the insufficient progress and delays are alarming.
