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.
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