Greece’s top bankers are right when they say that the country’s five largest banks are well capitalized compared with some of their competitors in the eurozone. Nevertheless, their strong commitment to expand into retail banking, which requires a great deal of capital, coupled with expected sizable write-downs at the end of this year due to unrealized losses of equity holdings, is likely to force a number of Greek banks to seek ways to boost their capital base from 2003 onward. Indeed, all five large banks, namely National Bank of Greece, Alpha Bank, Commercial Bank of Greece, EFG Eurobank Ergasias and Piraeus Bank, do not face a capital shortage at this time, partly thanks to the large amounts raised via rights issues during the Athens Stock Exchange’s heyday in the 1998-1999 period. Piraeus Bank even managed to beef up its capital base at the end of 2001 by acquiring a majority stake in capital-rich ETBA Bank. Alpha Bank, admittedly the one with the tighter capital base in this group of large banks, featured an estimated 9.6 percent capital adequacy ratio at end-June, which compares favorably with the 8.0 percent ratio required by the Bank of International Settlements (BIS) and other European banks. Moreover, the fact that Greek banks operate in a benign macroeconomic environment with expected GDP growth rates in excess of 3.0 percent in the 2003-2004 period seems to lend some support to the bankers’ thesis about credit quality, which could have had negative implications for their profits and capital base. Analysts seem to share the same view, saying the sector’s bad loans account for less than 5 percent of their total loan book and are declining, unlike in other European countries, such as Germany, where non-performing bank loans to households and corporations represent a much higher percentage, posing a serious problem to some banks’ financial health by undermining their profitability and capital base. Although this seems to be the official line, in private other senior bankers do express concerns about a capital shortage in some other Greek banks. These bankers also seem to share the views of some sector analysts who claim that some of the five large banks will also be forced, sooner or later, to take measures to address the issue of capital shortage by raising their Tier I ratio. Tier I capital, mainly share capital and reserves, and Tier II capital, subordinated loans, make up the capital which is used to calculate the BIS ratio. Given the poor state of the Athens stock market, all agree that it is highly unlikely that the five large Greek banks will resort to a rights issue to boost their Tier I capital and therefore their capital base. Even if they did so, they say, they would have had to do it at a steep discount to their current share prices, deepening their shareholders’ discontent. Fully comprehending the negative implications, some banks have already sought to strengthen their capital base by raising Tier II capital. Alpha Bank has already borrowed 525 million euros from its 3.0-billion-euro EMTN (Euro Medium Term Note) facility to beef up its capital base. However, bankers explain that the use of Tier II capital is not unlimited. This is not just because of the adverse effect borrowing has on the banks’ profitability but also for regulatory reasons. Tier II is not allowed to be more than 50 percent of Tier I capital. Faced with this constraint, banks have sought refuge in a central bank governor’s decree which gives the right to boost Tier I capital through the issuance of hybrid capital – that is, a combination of bond and equity – which of course also has some cost and therefore a negative impact on the banks’ net interest margin. Alpha Bank reportedly pursues that road. All skeptics, bankers and analysts alike, say that the need for a capital boost stems from declining profitability, which does not make enough room for retained earnings, a forecast reduction in own equity due to significant write-downs for unrealized losses on their equity holdings that local banks have to take at end-2002, and their strong drive into capital-consuming retail banking, mainly consumer, personal loans and mortgages. They add that even if banks opt for less generous dividend payout policies, this will not help all that much, since their profitability may get another hit if they are asked to apply higher provisions to protect themselves against possible future problems with bad loans. Although Commercial Bank, EFG Eurobank Ergasias and Piraeus Bank seem to have high capital adequacy ratios, that is above 11 percent, and do not need to raise capital in 2003 and (perhaps) 2004 to support their foray into the supposedly lucrative retail banking sector, there is a strong case that other local banks will be forced to boost their capital base next year and beyond. For them, Tier II capital will most likely not be enough, and they will have to start making plans to strengthen their capital base via Tier I capital. So, top Greek bankers may be right in saying local banks are well capitalized, but this does not apply to all banks at all times. It just applies to a few of them, at present.