Single-digit NPEs index in 2021 and bonus / malus system the “recipe” Pissaridis for banks


Two strategies – one long-term and one more immediate – that will help banks get rid of the “hoarseness” of “red” loans, suggests Professor  Christoforos Pissaridis.

In particular, according to the draft for the Development of the Greek Economy, which was prepared by a committee, under him, the main problem with banks and the source of many other difficulties (difficulty in lending to new businesses, slow digitization, lending to companies “zombies” ») Are problem loans.

“A first strategy is to solve the problem gradually, over a period of 3-5 years, mainly by utilizing the annual earnings before provisions to increase the provisions each year, as well as by securitization or sales of problem loans. The capital needs that may arise with this strategy can be met in the future, perhaps, under better conditions “, it is typically pointed out and added:” This strategy reduces the immediate needs for new capital, but prolongs the existing problems ” .

second strategy , which the Pissaridis committee considers to be the best, is to solve the problem more immediately either by creating a “bad bank” and transferring all the problem loans to it or through direct mass securitizations or sales. non-performing loans in the market by each bank separately.

“In both cases there is a need for capital. Recent securitizations show that for every € 1 billion of non-performing loans securitized, € 200 million in additional provisions and, consequently, funds are required. (This is the case, for example, if securitization income is € 300 million and forecasts are € 500 million, ie the bank predicts a loss of book value of € 500 million instead of € 700 million). “For sales of non-performing loans in the market, the need for provisions is greater.”

More specifically, the “bad bank” solution has the advantage of facilitating coordination between creditors , as all problem loans from one company are grouped under one roof. But there are drawbacks, especially in practice.

“Creating a ‘bad bank’ will require lengthy negotiations, especially as each bank is at a different starting point in terms of forecasts. During this period, which may last up to two years, the management of non-performing loans will be under-functioning. The banks have also proceeded to design and implement their own solutions each (eg securitizations), which have been approved by the SSM and the reversal of these solutions will have a cost “, it is noted characteristically.

An alternative is for each independent bank to move faster in consolidating its own non-performing loan portfolio through securitization and sales.

“Under this solution, the government, in consultation with the SSM, should accelerate the current three-year program to reduce non-performing loans, which has been approved by the SSM, and set a binding target for Greek banks that non-performing loans “All loans should be reduced to single digits at the end of 2021 (possibly with an extension provision if the pandemic continues in 2021)”, the committee recommends and adds:

“At the same time, a bonus / malus system should be introduced by the government and the SSM for deviations from the targets and for keeping ‘zombie’ companies in their portfolio. “This system may be based, as an indication, on more favorable capital requirements or more favorable tax treatment for banks that exceed their targets.”

Why… companies pay dearly for borrowing from banks

The Pissaridis Commission focuses on the high cost of borrowing for Greek companies from banks , analyzing the reasons as follows:

An important factor is non-performing loans , which (measured as NPE) account for about 40% of all bank loans, the highest rate in the Eurozone, with Cyprus at 35% and other countries much lower. Non-performing loans discourage new lending to businesses: either it is not realized at all or it is accompanied by high interest rates.

The negative relationship between non-performing loans and new borrowing can be understood as follows: Non-performing loans have a real value much less than their original book value in the balance sheets of banks. Their carrying amount decreases to fair value over time (eg through write-offs, sales or securitizations) and this results in significant losses to banks. Losses in turn create new capital needs.

Raising new capital, however, can be painful for existing old shareholders (the debt overhang effect is that new capital, arising from a share capital increase, makes the bank’s pre-existing debts more secure, thus increasing its value This value is reaped by the bank’s creditors – bondholders, depositors – at the same time, this value can not arise to the detriment of new shareholders, otherwise they would not invest in the capital increase. of existing old shareholders) and, thus, banks try to avoid it. Thus, with a small capital base and without new capital, banks are unable to offer new loans. This is, after all, prohibited by the minimum capital adequacy regulations of the SSM and the BoG.

second factor, which contributes to the high borrowing costs of companies, is the relatively high operating costs of Greek banks, which is transferred to businesses in the form of higher interest rates or commissions. The high operating costs are due to a number of factors, such as incomplete digitization of processes, overcrowded and inactive staff, etc ..

third factor in the high cost of corporate lending is the high cost of lending to the banks themselves in international markets.The high cost of lending to banks is due in part to the fact that Greece is considered a higher risk country than most other Eurozone countries. It is also due to non-performing loans. The amount of these loans (40% of the total), combined with the fact that a significant part of bank equity comes from future tax breaks (deferred tax assets are 60% of the total), creates uncertainty in international markets as to whether banks have sufficient funds and future income to cover their losses on non-performing loans. The recent actions of the ECB, where banks lend at very low interest rates even with low quality collateral, have significantly reduced the borrowing costs of Greek banks and, therefore, the importance of the third factor.

fourth and final factor is the inefficiency of the bankruptcy process , the cost of which is transferred from the banks to the interest rates and the remaining terms of their loans. The liquidation of the assets of a company, which is being liquidated, is a very time consuming process. This makes creditors often prefer to reach an agreement with shareholders to reorganize the business, even in cases where liquidation would direct resources to more productive businesses.

Reorganizing a business is also a time consuming process, which often reduces the value of the business. It is indicative that out of the 3,500 largest Greek companies, which faced problems from the beginning of the crisis, only about 100 chose the process of reorganization (Law 106).

Bankruptcy inefficiency not only increases the cost of financing but also perpetuates the problem of over-indebted businesses (“zombies”). Liquidation becomes an unattractive option for creditors, and there are also significant delays in reorganization. The distorted incentives created in the banks by the problem loans they hold contribute to the problem. This is because even if the liquidation brings significant resources, the banks are obliged to record losses in their balance sheets, while they have no such obligation if they leave the business in operation. The percentage of “zombie” companies was about 30% in 2016 and these companies represented about 30% of total lending.



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