All parties (Greek government, ESM, IMF in its programme moni-toring role, and the ECB) agreed that bank recapitalisation should be concluded before the BRRD’s bail-in rules became mandatory on 1 January 2016, to avoid haircutting uninsured deposits belonging to healthy Greek corporates, which would further set back the economic recovery. This aggressive timeline required the rapid conclusion of an asset quality review (AQR) and stress tests to assess capital require-ments – a task the SSM addressed efficiently, by all accounts. However, requiring all four systemic banks to raise funds simultaneously, in a risk-off market environment ahead of the US Federal Reserve’s tight-ening cycle, and before the Greek government had implemented bank-related reforms including a strategy to deal with NPLs, could only be achieved at fire-sale prices: the recapitalisation was concluded at a price-to-book ratio in the range of 0.30-0.35 for all four banks.
Regulation (CRR) does not count DTAs as capital because they are contingent on future profits, but counts DTCs as capital because they constitute a claim on the sovereign regardless of whether the bank makes a profit or a loss. Insofar as they constitute a liability for the state, large DTCs go obviously against the objective of breaking the link between banks and sovereigns.
89 ECB press release (2015), ‘Introductory statement to the press conference (with Q&A)’, 16 July, https://www.ecb.europa.eu/press/pressconf/2015/html/is150716.
en.html.
European banking supervision found that the four systemic banks needed a total €14.4 billion of additional capital, comprising
€4.4 billion under the baseline stress test scenario and an additional
€10 billion under the adverse scenario. The shortfalls included AQR adjustments of €9.2 billion, partly covered by existing capital buffers and baseline scenario profitability. “Covering the shortfalls by raising capital would then result in the creation of prudential buffers in the four Greek banks, which will facilitate their capacity to address poten-tial adverse macroeconomic shocks,” the ECB said in a statement90, adding that a minimum of €4.4 billion, corresponding to the baseline shortfall, was expected to be covered by private investors. By implica-tion, any bank that failed to attract private capital to cover the shortfall of the baseline scenario would be considered ‘failing or likely to fail’
and would thus be resolved.
As it turned out, Greek banks were able to raise as much as €9 bil-lion from private investors. Senior and junior bond instruments contributed €2.8 billion either through a voluntary liability manage-ment exercise or through bail-in; €5.2 billion was raised from new equity investors; and €1 billion mainly from asset sales. The chosen book-building process, with no effective minimum price set, helped attract private capital as share prices fell to new lows ahead of the November 2015 offering, with the consequence that existing share-holders were effectively wiped out. The €25.5 billion initial stake acquired by the Hellenic Financial Stability Fund (HFSF, a national entity set up under the first Greek assistance programme) in May 2013, worth just €2.1 billion in September 2015, was further diluted to
€750 million at the prices of the November 2015 offering (Figure 10).
Once this process was completed, residual capital requirements of
€5.4 billion – largely resulting from adverse-scenario stress test results for two out of the four banks – were filled by the Greek state (via the
90 ECB banking supervision press release (2015) ‘ECB finds total capital shortfall of
€14.4 billion for four significant Greek banks’, 31 October, https://www.banking-supervision.europa.eu/press/pr/date/2015/html/sr151031.en.html.
HFSF) using ESM funding. Three-quarters of the capital contributed by the HFSF, or €4.1 billion, was in the form of contingent capital instru-ments (CoCos), and the remaining €1.3 billion as common equity. The use of CoCos helped minimise the state shareholding in the banks.
Figure 10: Market value of HFSF shares in the four systemic banks
0 5 10 15 20 25 30
Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
Source: Hellenic Financial Stability Fund.
The Greek state’s share was diluted to minority stakes in all four banks, as shown by Figure 11. The HFSF’s stake in Alpha and Eurobank fell to just 11.0 percent and 2.4 percent, respectively (from 66.3 percent and 35.4 percent), as these two banks managed to fully cover their capital requirements from private investors. The MoU specifically stated that “the recapitalisation framework will be developed with a view to preserving private management of recapitalised banks and to facilitating private strategic investments”. Maximising the capital raised from private investors was therefore a key objective, even if it implied massive dilution of existing shareholders.
Figure 11: Greek state ownership of banks, before and after the 2015
ALPHA BANK EUROBANK NATIONAL BANK PIRAEUS BANK Before After
Source: Hellenic Financial Stability Fund.
As had been noted by President Draghi, uncertainty about the impact of capital controls and recession on NPLs, but also political uncertainty (snap elections on 20 September 2015 were called as soon as the MoU was signed), pointed to the need to err on the side of caution in deciding how much official funding to set aside for the recapitalisation. Although the recession in 2015 turned out to be more shallow than feared, with GDP growth estimated at -0.3 percent versus -2.3 percent underlying the programme, the outlook remained highly uncertain. The announcement of a €25 billion buffer took markets by surprise, coming so soon after the 2014 comprehensive assessment, but ultimately provided comfort that an adequate backstop would be available if needed. Uncertainty about the economic outlook and MoU implementation probably also explain why the SSM required higher capital ratios in Greece in 2015 than those underlying the 2014 pan-European comprehensive assessment: 9.5 percent for the base-line scenario (vs. 8.0 percent in 2014) and 8.0 percent for the adverse scenario (vs. 5.5 percent). Presumably European banking supervision targeted higher capital ratios for Greek banks than for their European
peers because their Pillar-2 SREP ratios are higher, reflecting their exposure to Greek sovereign risk and high levels of NPLs. Despite the higher standard, the big gap between the initial estimated need for public funds of €25 billion and the final outcome of €5.4 billion sug-gests that the SSM had underestimated the loan asset quality of Greek banks, as well as their ability to attract private capital.