BoG to dampen credit growth

Alarmed by the proliferation of housing loans, and the banks’ active efforts to push such products, the Bank of Greece has moved to curb credit growth, incurring the wrath of retail bankers. On Tuesday, Bank of Greece Governor Nicholas Garganas published a decision that forces banks to increase their provisions for housing loans that are over 12 months overdue. For a transitional period, until the end of 2006, the central bank will include a percentage of banks’ non-performing loans in its assessment of their capital adequacy. After that, that is, from the beginning of 2007, banks will be obliged to cover non-performing loans (over three years overdue) either through special provisions or a special reserve fund. Additionally, in taking account of the reserves required for a bank to be covered against bad debt, the banks will use the actual market value of properties rather than the lower «objective value» used by tax authorities to assess property taxes. In personal loans that use property as collateral, banks can use reduced provisions only for 75 percent of the property’s value, instead of the entire value as is the case today. The Bank of Greece, already alarmed by the rate of growth of housing loans, over 25 percent annually, was particularly alarmed by several banks’ moves to drop several charges, such as lawyers’ and engineers’ fees, that made housing loans more expensive. The Bank of Greece considers that a further acceleration of housing credit growth would be disastrous at a time when there are increased risks of a slowdown in economic growth and a rise in interest rates. Bank managers have countered that, with the amount of outstanding housing loans equal to 22 percent of Greece’s gross domestic product (GDP) versus 35 percent among the old 15 European Union members (that is, not counting the 10 newcomers who joined last year), Greek households cannot be classified as excessively indebted. But the central bank is worried more about the pace of credit expansion rather than the overall level of indebtedness. Bank of Greece analysts also fear that the period of historically low interest rates may be coming to an end. The Bank of Greece also wants retail banks to structure loans so that monthly installments do not exceed a certain percentage of a borrower’s income. According to the central bank, this varies between 30 and 40 percent, depending on income levels. While the Bank of Greece is not in a position to impose such a requirement legally, it can apply pressure by increasing banks’ provisions or requiring additional documentation. Additionally, banks are prompted to take account of the effect that a likely rise in interest rates would have on a loan-taker’s monthly installments. Many bankers complain that their lending operations are hampered by the fact that people no longer find it profitable to deposit their money in the bank. Yesterday, National Bank’s Chairman Takis Arapoglou called for incentives in favor of savings, in the form of tax cuts. «We would like to see a more favorable tax regime for savings accounts, although we consider that the situation is not yet ripe for that,» Arapoglou told a press conference. Asked about the bank’s investment plans, Arapoglou said that the sale of US subsidiary Atlantic Bank would make capital available for the acquisition of «healthy banks» in Southeastern Europe. «The future for investments lies in the Balkans,» said Arapoglou, who denied that there is a plan to merge National and Alpha banks, Greece’s two largest.