What about supervision?

The government’s 28-billion-euro (some 10.7 percent of Greece’s gross domestic product) rescue package for the ailing banks is a generous one. It does provide for the projected needs by the end of 2009. The only conditions set out in the plan are that a state official will participate on the board of the bank joining the lifeline program, coupled with a reduction in the top executives’ annual salaries. Sure, there is little in it that bankers could possibly complain of. The government measures are mostly focused on the day after, when they are expected to be hit by an undervaluation of assets, a slowdown in credit expansion and, should the crisis continue, huge difficulties in boosting their capital. Any questions concern the factors used to determine the banks to be included in the rescue package as well as their future supervision. Some banks are exposed to the volatile markets of neighboring states, such as Turkey or Romania. Others are prone to giving out loans without security. So the state must introduce checks to ensure sober management. Or the bailout will open the door to greater risk and a lax attitude. These issues should be of concern to taxpayers and banks alike. The government, with its guarantee, is taking on the banks’ credit risk, turning it into its own solvency risk. If a bank takes out a loan with a state guarantee but cannot repay it, the government will be obligated to take a stake in the lender, which would be needed to help restore investor confidence in the financial institution. The limit is 51 percent of a bank’s share capital. Then, the bank’s credit rating will be equal to that of the government’s and the lost confidence will be restored but the bank will have been nationalized. What the banks and the government want to avoid may become reality – even though Greek banks don’t own any toxic assets.

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