Skip to main content
The Actuary: The magazine of the Institute and Faculty of Actuaries - return to the homepage Logo of The Actuary website
  • Search
  • Visit The Actuary Magazine on Facebook
  • Visit The Actuary Magazine on LinkedIn
  • Visit @TheActuaryMag on Twitter
Visit the website of the Institute and Faculty of Actuaries Logo of the Institute and Faculty of Actuaries

Main navigation

  • News
  • Features
    • General Features
    • Interviews
    • Students
    • Opinion
  • Topics
  • Knowledge
    • Business Skills
    • Careers
    • Events
    • Predictions by The Actuary
    • Whitepapers
    • Moody's - Climate Risk Insurers series
    • Webinars
    • Podcasts
  • Jobs
  • IFoA
    • CEO Comment
    • IFoA News
    • People & Social News
    • President Comment
  • Archive
Quick links:
  • Home
  • The Actuary Issues
  • December 2015
12

Lessons from a Greek tragedy

Open-access content Thursday 26th November 2015 — updated 5.50pm, Wednesday 29th April 2020

Konstantinos Drakos predicts challenging times ahead for the Greek banking sector

2


The Greek banking sector is a typical peripheral system, characterised by relatively low global linkages. This feature provided an unexpected insulation mechanism that allowed Greek banks to escape the 2008 crisis largely unscarred. But later, they entered into a period of strain as a consequence of the Greek sovereign debt crisis. 

—

The starting point was this debt plunging the macro economy into an unprecedented recession, in terms of depth and duration. The past five years has witnessed a cumulative GDP loss that exceeds a quarter of its nominal level, while unemployment soared from about 10% to 27%. It was not long until these macroeconomic conditions were reflected in the banks' performance. Greek banks witnessed a deterioration of their assets' quality, since non-performing loans and delinquency rates increased substantially.

Another major blow was given by the (in)voluntary participation of banks in the Private Sector Involvement agreement, which produced about a 50% loss to their sovereign bond portfolio, comprising mainly Greek government bonds. Hence, Greek banks found themselves unable to meet Basel requirements, a situation that called for prompt corrective action, which took the form of a recapitalisation package mainly funded by the Greek state.

Apart from the drop in asset quality, Greek banks faced a liquidity problem brought about by their inability to raise funds in debt and capital markets, but, perhaps more crucially, by the continuous drop in deposits. This drop is certainly explained partly by the ongoing recession, but also by the deposits withdrawals owing to the depositors' quest for safety. Deposit withdrawals are the natural response to increased uncertainty in a context where government's explicit and implicit guarantees are questioned.

There is no doubt the Cypriot bail-in left its negative imprint on depositors' trust. It seems maintaining this trust will prove a more costly task in the future whenever a country is hit by a systemic banking crisis.
Public trust was further shaken by the recent imposition of capital controls. Capital controls were imposed as a last resort in order to avoid a massive deposits withdrawal and thus a bank run. Before the controls were put in place, there was a prolonged period of economic uncertainty, which followed general elections and negotiation talks that led to the referendum, held in July. This was the trigger for accelerating deposit withdrawals, leaving bank deposits to record low levels. Although there have been some relaxing adjustments to the initial capital controls, they are still in place, causing problems for firms needing raw materials from abroad and generally to international transactions.

E-banking and debit/credit card use was low, so agents were caught off-guard, and, with the negative psychological impact, this produced a significant consumption deferral. A positive side effect was that, very swiftly, e-banking and, in general, non-cash transactions exhibited increased penetration to parts of the population and firms that were unfamiliar or reluctant to use them before.

The million-dollar question is what the future will hold for Greek banks. It is clear the banking system desperately needs recapitalisation. The amount needed is yet to be determined and certainly will be finalised after the European Banking Authority performs the relevant stress tests. Based on the last available tests, before the imposition of controls, according to the adverse scenario at least two out of the four systemic banks would fall short by 50% of the Basel requirements. It remains to be seen whether the actual developments surpassed the assumptions of the stress tests' adverse scenario.

Consolidation possibilities
The Greek banking sector consists of four systemic banks and a dozen small cooperative banks with a limited regional operational profile. Provided all four systemic banks survive, it is questionable whether all of them can operate profitably in the medium term, and I believe consolidation is unavoidable.

My prediction is that the cooperative banks will embark on a series of mergers, with the resulting banks having a wider geographical scope. They might opt for a mega-merger, resulting in a single bank focusing on regional development or micro lending.

The greatest challenge is rebuilding public trust and confidence, without which no banking system can operate. Recapitalisation and the removal of capital controls will be steps in the right direction, but rebuilding trust and confidence is bound to need more than just that.
 
The bottom line is that trust in the banking system is a very fragile intangible asset that is gained over time and depends on qualitative factors over and above just financial ratios. From a selfish, academic point of view, this is a large-scale social experiment, and the outcome will teach us important lessons for the future.

Note: this article was written before the European Central Bank determination

Dr Konstantinos Drakos is associate professor at Athens University of Economics and Business

This article appeared in our December 2015 issue of The Actuary.
Click here to view this issue
Filed in
12

You might also like...

Share
  • Twitter
  • Facebook
  • Linked in
  • Mail
  • Print

Latest Jobs

Catastrophe Modelling Analyst - London Market Broker

London, England
£40000 - £50000 per annum
Reference
145925

Senior Catastrophe Analyst

England, London
£65000 - £75000 per annum
Reference
145924

Life Actuary - Financial Reporting - Day Rate contract

Negotiable
Reference
145923
See all jobs »
 
 

Today's top reads

 
 

Sign up to our newsletter

News, jobs and updates

Sign up

Subscribe to The Actuary

Receive the print edition straight to your door

Subscribe
Spread-iPad-slantB-june.png

Topics

  • Data Science
  • Investment
  • Risk & ERM
  • Pensions
  • Environment
  • Soft skills
  • General Insurance
  • Regulation Standards
  • Health care
  • Technology
  • Reinsurance
  • Global
  • Life insurance
​
FOLLOW US
The Actuary on LinkedIn
@TheActuaryMag on Twitter
Facebook: The Actuary Magazine
CONTACT US
The Actuary
Tel: (+44) 020 7880 6200
​

IFoA

About IFoA
Become an actuary
IFoA Events
About membership

Information

Privacy Policy
Terms & Conditions
Cookie Policy
Think Green

Get in touch

Contact us
Advertise with us
Subscribe to The Actuary Magazine
Contribute

The Actuary Jobs

Actuarial job search
Pensions jobs
General insurance jobs
Solvency II jobs

© 2023 The Actuary. The Actuary is published on behalf of the Institute and Faculty of Actuaries by Redactive Publishing Limited. All rights reserved. Reproduction of any part is not allowed without written permission.

Redactive Media Group Ltd, 71-75 Shelton Street, London WC2H 9JQ