Preserving Financial Stability: The Supervisors' Perspective

1. 1st Bank of Greece Workshop on Economies of the Eastern European and Mediterranean Countries The Global Financial Crisis and SEE: Lessons for macroeconomic policy and financial stability Session II : Preserving financial stability: the supervisors’ perspective Charalampos Vogiatzis Athens, 14 May 2010

2. Preserving Financial Stability: The Supervisors' Perspective Presentation • Supervisors, financial stability and the current crisis : exploring the topic • Greek banking groups: a crucial factor for the stability of the region • Bank of Greece Response as home and host supervisor • Cross-border Cooperation • Addressing concerns for Greek fiscal crisis implications • Conclusions 2

3. Exploring the topic

4. The players and their interaction Exploring the topic

5. Preserving Financial Stability: The Supervisors' Perspective Presentation • Supervisors, financial stability and the current crisis : exploring the topic • Greek banking groups: a crucial factor for the stability of the region • Bank of Greece Response as home and host supervisor • Cross-border Cooperation • Addressing concerns for Greek fiscal crisis implications • Conclusions 5

6. Greek Banks in SEE & CEE. 6

7. Greek Banks in SEE & CEE. At the end of 2009 • 24 banks • 2.897 business units • 38.811 employees • Total loans to customers in New Europe €47.3billion • Profits exceeding € 390million

8. Market Share (% assets) 35,0% 29,0% 28,0% 30,0% 26,5% 25,0% 19,8% 20,0% 16,3% 15,9% 15,0% 10,0% 6,4% 4,6% 5,0% 2,1% 1,6% 0,0% Albania Bulgaria Romania Serbia FYROM Turkey Ukraine Poland Total New Total SEE Europe Greek Banks’ market shares in host countries SEE entities significant both for domestic markets and the Greek groups. 8

9. Meeting financing needs of local economies • Greek banking groups credit expansion in the region 3.8% during Q1 2010 (total loans at end of Q1 2010 € 49.1 billion) 9

10. Long standing commitments • Despite liquidity squeeze funding from parent institutions remained unchanged (€ 18 billion) • Increase of local deposits by 4.7% during Q1 2010 without increasing deposit interest rates • Loans to deposits ratio improved but still high (163% at end of March 2010) • Funding to cross border entities is not considered as a liquidity source for parent institutions

11. Supervisory concerns • Economic conditions in Eastern Europe have been deteriorated since Q4 2008 but in many cases things seem to be stabilised • Positive effects from IMF intervention • Less foreign capital flows • Depreciating local currencies and relevant implications for foreign currency denominated loans and equity participations 11

12. Supervisory concerns • Reduction of import demand from the rest of Europe due to the crisis implications • Implications of fiscal crises in home countries • Asset quality deterioration on the back of the worsening operating environment • Slow down of credit expansion • Decreased operating income and profits 12

13. Preserving Financial Stability: The Supervisors' Perspective Presentation • Supervisors, financial stability and the current crisis : exploring the topic • Greek banking groups: a crucial factor for the stability of the region • Bank of Greece Response as home and host supervisor • Cross-border Cooperation • Addressing concerns for Greek fiscal crisis implications • Conclusions 13

14. BoG supervisory response For entities in SEE…. • Active support of the European Bank Coordination Initiative. • Encourage banks to keep their SEE subsidiaries well capitalized. • Monitoring of fundamental figures on a monthly basis. • Suggestions to promote further their risk management practices and internal control systems in the region. 14

15. BoG supervisory response ….and for the Group • Pre-emptive action to increase the loss absorption capacity of Greek Banks (Tier I> 8%). • Testing the resilience of the banking sector under IMF assumptions. • Frequent on-site examinations (e.g. adequacy of loan provisions) • Close monitoring of Greek banks' liquidity positions and contingency funding policies. 15

16. Preserving Financial Stability: The Supervisors' Perspective Presentation • Supervisors, financial stability and the current crisis : exploring the topic • Greek banking groups: a crucial factor for the stability of the region • Bank of Greece Response as home and host supervisor • Cross-border Cooperation • Addressing concerns for Greek fiscal crisis implications • Conclusions 16

17. Home host cooperation Strong Home/Host co-operation before the crisis…. • Bilateral MoUs • Governor’s Club meetings • SEE Multilateral MoU. • Joint Inspections • Exchange of findings reports 17

18. Home host cooperation ….and in the aftermath of the crisis • Bilateral meeting of Governor’s and Heads of Banking Supervision with the participation of banks’ top management. • Speed up the settlement of Colleges of Supervisors • Arrange Joint Risk Assessment issues on an horizontal basis. 18

19. Home host cooperation ….and in the aftermath of the crisis (2) • Exchange of visits of home and host supervisors • Comprehensive communiqués • Immediate provision of information for urgent issues - teleconferences • Participation in EU programs 19

20. Preserving Financial Stability: The Supervisors' Perspective Presentation • Supervisors, financial stability and the current crisis : exploring the topic • Greek banking groups: a crucial factor for the stability of the region • Bank of Greece Response as home and host supervisor • Cross-border Cooperation • Addressing concerns for Greek fiscal crisis implications • Conclusions 20

21. Addressing concerns for Greek fiscal crisis implications • Unlike other countries, the challenges facing the Greek commercial banks do not originate in the banking sector. • This is a fiscal crisis that have negative effects on the banking sector unless it is forcefully addressed in the coming months. • Greek commercial banks proved sound and resilient 21

22. Addressing concerns for Greek fiscal crisis implications • Credit risk higher but not accelerating • More conservative credit policies and higher provisions • Market risk exposure contained • Liquidity position under pressure but manageable thanks to ECB • Effectivestate support plan 22

23. Addressing concerns for Greek fiscal crisis implications • SE Europe more of an opportunity than a challenge. Greek eentities in the region well funded and capitalized to reduce contagion risk • Intensified on site examinations • Communication with top management and treasurers of banks almost on a daily basis 23

24. Addressing concerns for Greek fiscal crisis implications • Banks required to develop a new strategy for the new era • Involvement of Board of Directors • Exit plans • Increased frequency of reporting • Improve systems and controls 24

25. Addressing concerns for Greek fiscal crisis implications Joined IMF-EC-ECB plan: • Credible plan of € 110 billion which addresses funding needs of Greece for the next crucial years • Political will to implement the strict austerity measures. • Stability fund with €10 billion available to further boost banks’ capital if needed • Regular reviews of the Greek banking system by experts of the three institutions

26. Addressing concerns for Greek fiscal crisis implications In addition • ECB decision for the eligibility of Greek Government Bonds • Expansion of state plan by € 15 billion • ECB decision to intervene in public and private debt markets to ensure liquidity in financial segments that are dysfunctional. • EU package of € 500billion plus IMF contribution of 200-250 billion

27. Preserving Financial Stability: The Supervisors' Perspective Presentation • Supervisors, financial stability and the current crisis : exploring the topic • Greek banking groups: a crucial factor for the stability of the region • Bank of Greece Response as home and host supervisor • Cross-border Cooperation • Addressing concerns for Greek fiscal crisis implications • Conclusions 27

28. Conclusions Europe needs a fundamental overhaul of its financial stability architecture that allows its citizens to enjoy the benefits of financial integration and protects them against the kind of twin fiscal-financial crises that are currently afflicting several member states. The reform of the supervisory and regulatory framework that is currently before the European Parliament is very important, but takes us only half the way. It needs to be matched by an integrated EU crisis management and resolution framework. Dominique Strauss-Kahn Brussels, March 2010 28

29. Preserving Financial Stability: The Supervisors' Perspective Thank you! Charalampos Vogiatzis Deputy Director Bank of Greece Department for the Supervision of Credit and Financial Institutions