Greek Banking

Until the 1980s the Greek banking industry was characterized by various restrictions and administrative regulations, with extensive government intervention influencing the pricing, volume and allocation of financial resources, all contributing to a low degree of competition and poor competitiveness.¹ However, in an attempt to keep up with developments in the financial industry worldwide, to incorporate EU regulations into its banking legislation and to enhance the competitiveness of banks, Greece introduced a number of initiatives. As mentioned in Hondroyiannis et al. (1999), the deregulation began in the early 1980s with an aim to set the foundations for the conduct of quasi—independent monetary policy and the rationalization of the credit market. This was followed by the extensive liberalization of the late 1980s and early 1990s, a period characterized by: (i) the implementation of the EC Council Directives, (ii) the lifting of foreign exchange controls on current transactions and capital movements, (iii) the liberalization of interest rates, (iv) the abolition of direct credit controls, (v) the de—specialization of credit institutions, (vi) the licence to offer new products, (vii) the allowance to use financial derivatives and (viii) the freedom to provide cross—border financial services within the EU. To respond to these changes in their operating environment, Greek banks expanded their services into various areas (e.g., real estate, insurance), and they increased their off—balance sheet operations and non—interest income.

The operating environment can have a substantial impact on the performance and decision—making of banking institutions. The first sections of this chapter outline the developments in the basic macroeconomic indicators in Greece. Then the discussion moves on to the institutional framework and the ‘doing business environment’. On several occasions, the data are summarized over three periods: (i) 1996–2000 (i.e., prior to the entry of Greece into the euro area), (ii) 2000–7 (i.e., the years prior to the crisis) and (iii) 2008–10 (i.e., the years of the crisis).

There is no doubt that banks are the most important players in the financial services industry. In fact, non-bank financial sectors (insurance companies, mutual funds, investment firms, etc.) make up only a very small part of the Greek financial system. However, given the linkages of these sectors with banking as well as with the overall economic development, the present chapter provides a brief discussion of the recent trends in these sectors. Furthermore, Section 3.3 discusses the developments in capital markets, focusing on the Athens stock exchange (ASE) and the market for government paper. The conditions in the stock exchange can influence the banking sector through various avenues. First, the stock exchange can be an alternative source of funds for corporations. Second, as most of the Greek banks are publicly listed their stock market capitalization depends on the conditions in the ASE. Considering that Greek banks traditionally maintain important positions in government paper issued by the Greek state, the developments in this market can have important implications for the sector.

The history of central banking goes back to the seventeenth century, with the establishment of the Bank of Amsterdam in 1609 (Quinn and Roberds, 2009), that was followed by the foundation of the Swedish Riksbank in 1668. One of the most well-known central banks in Europe, the Bank of England, was established in 1694 with the goal of purchasing government debt and financing the King’s military campaign. The establishment of the Banque de France in 1800 aimed to stabilize the hyperinflation of paper money and to aid government finance (Bordo, 2007; Lykogiannis, 2003).

As discussed in Chapter 4, the Bank of Greece, in particular, the Department for the Supervision of Credit and Financial Institutions, is responsible for the prudential supervision of the Greek banking sector. Within this context, the BoG has issued executive decisions laying down supervisory rules in the areas of: (i) capital adequacy (Basel II), (ii) adequacy of provisions, (iii) liquidity, (iv) reporting and (v) internal control systems.

Retail banking constitutes the main element of the domestic banking system. Therefore, this chapter discusses the developments in the distribution channels, the means of payment, the financial cards market, the loans market and the deposits market in Greece over the last decade. The statistics in Chapter 1 illustrate that the number of retail bank branches in Greece has increased considerably over the last 15 years or so. However, the competitive environment in which banks operate, as well as technological advances, does not allow them to ignore the alternative distribution channels discussed in Section 6.2. The use of cashless means of payment has also developed significantly in recent years (Section 6.3); however, cash maintains its importance in daily transactions in Greece. Section 6.4 provides a detailed discussion of the financial cards market, while distinguishing between credit cards, debit cards and delayed debit cards, while Sections 6.5 and 6.6. discuss the developments in various segments of the loans and deposits market compared with other member states of the EU.

The performance of banks is monitored by numerous stakeholders such as investors, regulators and depositors, and the success or otherwise of banking institutions in meeting their expectations is usually examined by careful study of their financial statements. Thus, this chapter provides a detailed look at the most widely used indicators of performance of commercial and cooperative banks, while comparing them with their counterparts in other countries. In addition, it discusses the findings of empirical studies on the efficiency and profitability of Greek banks.

Chapter 7 discussed the performance of banks, with a particular focus on profitability. However, the increase in profitability is usually associated with higher risk-taking. After all, risk is an integral part of the banking industry, which means that the managers of modern banking institutions must operate within certain levels of risk to achieve the best or more favourable risk-return outcome for their shareholders. Furthermore, the efficient management of risks in the Greek banking sector is becoming essential in the light of Basel II, adopted in 2007. Within this context, this chapter discusses the main types of risk faced by Greek banks, the trend in various indicators (e.g., non-performing loans), as well as the tools that are used to ensure bank soundness (e.g., credit risk modelling and value at risk models).

Corporate governance, which refers to the process and structure for overseeing top managers so that they effectively fulfil the mandate of the firm, is not a new topic. Actually, the recognition of the incentive problems that arise when decisions are taken by managers who are not owners of the firm dates back to the work of Adam Smith (1776), while modern interest in the field is usually associated with the work of Berle and Means (1932). The studies of Jensen and Meckling (1976), Fama (1980) and Fama and Jensen (1983) are also considered classic in the field. While the board of directors is generally seen as the ultimate corporate control mechanism, recent reports on governance highlight the importance of board committees such as audit, remuneration and nomination committees, as well as additional monitoring controls. In any case, the accounting scandals in the early 2000s (e.g., Enron and Worldcom) and the recent financial crisis have generated a new round of discussions about the effectiveness of existing corporate governance mechanisms.

The last chapter of this book discusses a number of recent events that affected the Greek banks during 2011 and posed great challenges for the future. Within this context, Section 10.2 provides an overview of the financial results and stock performance during the first months of 2011. This is followed by discussions of the downgrade of the banks’ credit ratings (Section 10.3), the results of the EU-wide stress testing exercise (Section 10.4) and the restructuring of the banking sector (Sections 10.5 and 10.6). Finally, Section 10.7 provides an overview of the future challenges that arise from the exposure of banks to Greek government bonds, the developments in the business and macroeconomic environment, the exposure to South-eastern European countries and the forthcoming changes in the regulatory framework.