Consequences of the Financial Crisis and Capital Adequacy in Greek Banks ()
1. Introduction
The decade of 2010 was characterized for the Greek economy by a deep economic crisis with severe consequences for the banking system. The high level of public debt, which the Greek government could not service in 2010, led to financing by the European Central Bank, the European Commission, and the International Monetary Fund. The financing was followed by an austerity program that triggered a severe recession in the Greek economy for much of the following decade. Greek banks suffered the consequences of this program with the slowdown of activities, the loss of deposits, and, most importantly, the sharp increase in non-performing loans (NPLs). In addition, many Greek banks suffered heavy losses due to the halving of the value of the Greek bonds in which they were engaged after the private sector involvement (PSI) program, based on which, in 2011, new bonds replaced old bonds, having half of the old value. The main argument of the Greek state for the creation of the PSI was the risk of the immediate bankruptcy of the Greek state and, consequently, the suspension of any payment from the Greek state. The PSI caused additional losses for the participating banks. As a result, Greek banks struggled to meet capital requirements. Apart from four banks classified as important for the economy, which received continuous and substantial support, the others had to raise the necessary funds for their recapitalization, mainly from the private sector. Several banks that could not complete their recapitalization were forced to close, be taken over by their parent bank, or be sold. The consequences affected commercial and cooperative banks and led to significant changes in the Greek banking system, which was characterized by a sharp decline in the number of banks and an excessive concentration of the banking system in four banks at the end of the decade.
This article aims to examine the consequences that the crisis of the 2010s had on the Greek banking system, especially in the context of the capital adequacy problem. What actions did these banks take or decide to take, and what were the consequences for the banking system? After the introduction, the second section reviews the characteristics of the banking crisis, mostly European cases, to date. Section 3 discusses some of the critical macroeconomic parameters of the Greek crisis. Section 4 addresses the issue of capital adequacy and its implications for Greek banks. Section 5 examines the changes in the Greek banking market, while the final section concludes.
2. Literature Review of Crisis Results over the Banking Systems
Banks’ behavior and the crisis’s impact on banks’ functioning and outcomes have been the subject of several papers that have focused on a country or a panel of countries or have undertaken a comparative study between capital banks and cooperative banks.
Some studies focused on the issues of supervision and capitalization. Cihak et al. (2012) found that the crisis had a more significant impact on countries with less stringent capital policies and lower actual capital ratios, fewer restrictions on nonbank activities, bad loans and loan losses, and supervision of banks’ risks. Parrado-Martinez et al. (2014) reached the same conclusions, assuming that structural deficiencies and the lack of macro-prudential supervisory and regulatory mechanisms differentiated the global crisis across countries. The gap between financial innovation and regulatory updating could explain the banking crisis, according to Hamdaoui and Maktouf (2020) . Jorda et al. (2021) concluded that a better-capitalized bank system could recover faster from the financial crisis.
Other studies have focused on banking activities. Creel et al. (2021) studied a panel of EU countries over the period 1998-2012 and found a positive effect of credit on bank fragility in the euro area but not in the periphery of the EU. They also found a negative effect of bank fragility on lending for the EU as a whole. Keffala (2018) using data from 22 Italian commercial banks from 2005-2015, concluded that derivatives should not be considered a cause of fragility in the Italian banking system. Pereira et al. (2018) used panel data from OECD countries for 21 years and found that a country’s high bank leverage and slow gross domestic product (GDP) growth are the main determinants of a banking crisis.
Other studies focused on the comparative behavior of capital and cooperative banks. In several studies, cooperative banks exhibit more prudent behavior and perform better than capital banks (Bazot et al., 2019) . In the case of France, cooperative banks responded better to the crisis than capital banks (Ory, 2019; Richez-Batesti & Leseul, 2016) . Groeneveld (2016) came to the same conclusion for the Netherlands. Paceli et al. (2019) in a study of mutual banks in Italy, Germany, France, and Spain, concluded that European mutual banks have a higher degree of efficiency than commercial banks. Efficiency is related to the efficiency of traditional lending, the degree of prudence in provisioning for credit risks, and the level of liquidity. It appears that the structure of assets based on traditional banking operations had a higher profitability during the crisis (Groeneveld & de Vries, 2009) , which is to be expected since the main problems of the crisis resulted from risky operations in which cooperative banks had little involvement, given their philosophy of supporting their members, which are usually small businesses. Similar conclusions are also reached by Migliorelli (2018) , who notes that the analysis shows that cooperative banks outperformed other types of banks in lending in Germany and throughout the northeastern half of the euro area, while no significant differences were observed for the rest of the continent. The main reason for this phenomenon is likely to be found in the impact of non-performing loans on the capitalization of cooperative banks and the decision to reduce leverage by restricting lending. In the case of Finland, the two largest cooperative banking groups, the OP group and the POP group, which have a sound capital structure, were exemplary (Kalmi, 2016) . These conclusions were also reached by Birchall and Ketlison (2009) , who argue that customer-owned cooperative banks were more stable and efficient than large traditional banks during the crisis. In the Greek case, Hardouvelis (2021) pointed out the relation of non-performing exposures with the financial crisis.
3. The Greek Economic Crisis
In Greece, the financial crisis 2008 turned into an economic crisis in the following decade due to the sovereign debt crisis. The Greek state, having a public debt estimated at 127% of GDP at the end of 2009 and a public deficit estimated at 15.2% of GDP, could not resort to private capital to finance its debt and, in particular, to repay the bonds that matured in 2010 (Karafolas, 2019) . The recourse to the European authorities (European Commission and European Central Bank) and the International Monetary Fund was necessary to finance these needs and to meet the needs for the functioning of the state (Bank of Greece, 2014) . The new indebtedness of the Greek state has led to implementation of a rigorous austerity program aimed at reducing the public deficit immediately and, in the longer term, the public debt and transforming the Greek economy. The consequences of this economic policy were significant in the following decade, leading to a recession of the Greek economy, characterized by a decrease in GDP and a very significant increase in unemployment (Table 1). In the second half of the 2010s, especially from 2017, the economy recovered but reversed in 2021 due to the COVID pandemic. Banks also suffered the consequences of this recession, as deposits decreased especially the first half of the decade and banks’ loans. However, the most important consequence was the extraordinary growth of non-performing loans (NPLs); these increased from 10% of all loans in 2009 to 49% in 2016 before finally falling to 33% in 2020 and in 8% in 2022, due to the most strict loan policy and in particular to the purchase of NPLs by Special Purpose Vehicles (see Karafolas & Ktenidou, 2019 , and Hardouvelis, 2021 ).
4. The Issue of Greek Banks in the Face of Crisis and Capital Adequacy
4.1. Crisis Problems and Capital Adequacy
The Greek case represents a particularity for the study of the consequences of the 2008 financial crisis since the Greek economic and financial crisis was much longer and deeper compared to the other countries due to the particular problems of the country, especially the public debt and the austerity program put in place after the global financial crisis. In the case of Greece, all banks faced severe problems, including the large traditional banks. The results of these banks could have been better, and their survival depended on public aid. So, is it managerial inadequacy, as questioned by Bancel and Boned (2014) that led to the problems of Greek banks? The answer would be yes if it affected only certain banks, and some Greek banks have withstood the crisis better than others; this could result from more appropriate management. However, it is necessary to highlight the general nature of the crisis in the Greek banking market in the decade of 2010, which affected both cooperative and capitalist banks. It is significant that, in mid-2010, NPLs accounted for around 50% of total loans in both corporate and retail lending (Figure 1).
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Table 1. Evolution of macroeconomic parameters in Greece, annual evolution (%).
Sources: Bank of Greece (2023a, 2023b) and Hellenic Statistical Authority (2023) , (authors’ calculations).
NPLs have been a primary consequence of the financial crisis and caused a critical problem for the banks’ adequacy, see also Karafolas & Ktenidou (2019) , and Hardouvelis (2021) .
NPLs’s issue was even more critical in the case of cooperative banks, as these banks were opened mainly with these loans rather than with public financing, which has a risk ratio of 0%. NPLs must also be combined with the massive decline in activity in specific sectors of the economy, such as real estate construction, which has always been the locomotive of the Greek economy. As a result, there has been a sharp decline in property loans offered by banks. We find the same problem in the Italian case, particularly concerning the risk of mortgages for Banche de Credito Cooperativo (Catturani & Stefani, 2016) . At the same time as this decline in activity, the fall in income and unemployment led to a decline in consumption and consumer credit. In this context, the study of Greek banks during the Greek crisis must be seen.
The Greek banks, as a whole, faced a severe problem of capital adequacy imposed by the international prudential standards, especially the “Basel III” requirements (Karafolas & Kleanthous, 2019) . The issue of bank capital was raised as early as 1988 within the Bank for International Settlements by the Basel Committee, which established a solvency ratio called the “Cooke coefficient”, which expresses the ratio of capital to risk-weighted assets (Bank for International Settlements, 2015; Delaite, 2012) . This agreement was implemented in 1992 in the countries represented in the Basel Committee. It was followed by a second agreement (“Basel II”), which came into force in January 2008 in the European Union, and a third (“Basel III”), which came into force in 2013 in the context of the supervision of financial institutions (European Union, 2013) . The focus is on common equity, the minimum level of which is raised to 4.5% of risk-weighted assets but must rise to 8% and even 12% if circumstances so require. The Greek economic crisis has hurt both banks’ activity and results, leading to severe problems with bank equity. Non-performing loans, in particular, have led to significant risk provisions. These provisions are deducted from the banks’ profits, resulting in lower profits and even losses for the banks. The losses for the year are transferred by deduction from the bank’s equity, which leads to a reduction in the bank’s equity. Consequently, the bank is forced to increase its equity as a shareholder or cooperative to meet the capital requirements set by Basel III. All Greek banks have been forced to increase their equity capital.
Among them, four banks have received financial support from the Financial Stability Fund to ensure the necessary increase in equity. Alpha Bank, Eurobank, National Bank of Greece, and Piraeus Bank are essential for the economy (European Central Bank, 2017) . These banks passed under the control of the Financial Stability Fund (FSF), which became the main shareholder. The other banks had to raise the necessary capital from private funds from old or new shareholders.
4.2. Banks That Have Been Sold or Whose License Has Been Revoked
Among banks that have had their license revoked or sold, a distinction can be made between capital and cooperative banks, large banks, and small banks based on assets. Of the capital banks, two are under state control, and three others are subsidiaries of foreign banks (Table 2).
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Table 2. Banks with license revoked or sold.
(*) National Bank of Greece. (**) Acquired after revocation of license as subsidiary of the Post Bank. Source: Authors’ calculations based on banks’ annual reports.
4.2.1. Capital Banks
a) Banks under state control
Agricultural Bank of Greece (ABG) was a bank that specialized in agricultural activities, listed on the Athens Stock Exchange, but its main shareholder was the Greek state. The bank suffered from negative results due to NPL and primarily to ABG’s participation in the Private Sector Involvement Program (in which old Greek government bonds were exchanged for new bonds at half price). PSI ABG’s losses amounted to ?329 million in 2011, much higher than the banks’ equity (Table 3). In March 2012, the Bank of Greece proposed the consolidation of ABG through a purchase and acquisition process. In July 2012, the FSF approved Piraeus Bank’s offer, and the Bank of Greece transferred ABG’s activities to Piraeus Bank. However, as the transferred assets had a lower nominal value
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Table 3. Private sector involvement consequences on Greek banks, (estimations on May 2012, in ?illion).
Source: Bank of Greece, 2012 .
than the liabilities, the FSF covered the difference with ?471 million in January 2013 by providing Piraeus Bank with EFSF bonds; in addition, an amount of ?70 million was issued against ordinary shares to achieve the recapitalization. The price paid for Piraeus’ acquisition of ABG was ?5 million (European Commission, 2015) .
Post Bank was a Greek savings bank founded in 1902 and, since 2006, listed on the stock exchange under state control. In 2010, Post Bank acquired 32.9% of the share capital of T Bank. As in the case of ABG, Post Bank faced severe losses due to its participation in the PSI program; its losses reached ?444 million, much higher than the bank’s equity, Table 3. The losses from PSI and those due to NPL severely affected the capital adequacy and, consequently, the bank’s recapitalization. In January 2013, the Bank of Greece proceeded with the dissolution and liquidation of the bank and the creation of a transitional credit institution. The share capital of the transitional credit institution was set at ?00 million and was fully paid by the FSF (in the form of FSF bonds), who became the sole shareholder. The newly founded bank received an operating license from the Bank of Greece and was capitalized with ?.6 billion from the Financial Stability Fund. Eurobank acquired the new banking institution, having the best offer (European Commission, 2014) . According to the offer, Eurobank had to pay the FSF the amount of ?81 million to acquire 100% of the bank’s share capital in the form of new Eurobank common shares.
b) Subsidiaries of foreign banks
In the case of the three subsidiaries of foreign banks, Emporiki Bank, Geniki Bank, and Millenium Bank, the losses and difficulties they faced led the parent banks Crédit Agricole, Société Générale and Banco Comercial Portugues, respectively, to sell them.
In the case of Emporiki Bank, its parent bank, Crédit Agricole, allocated significant funds to successive share capital increases that did not have the expected consolidation results of the Greek subsidiary, burdening the results of the parent Crédit Agricole. Emporiki Bank’s negative results resulted from both NPLs and the bank’s losses with PSI participation. In 2012, the parent bank decided to sell Emporiki Bank by initially boosting its capital and selling it to Alpha Bank. According to the terms of the acquisition (Alpha Bank, 2012) , Crédit Agricole had to pay ?.85 billion for the capital reinforcement of its subsidiary. Crédit Agricole also had to buy a ?50 million bond issued by Alpha Bank convertible into shares. Alpha Bank acquired all the issued shares of Emporiki Bank for a symbolic purchase price following the terms and conditions set by the Financial Stability Fund. With this agreement, the consolidated bank is capitalized by ? billion.
In the case of Geniki Bank, this bank faced severe adverse losses from the PSI program in addition to the NPLs problems, Table 3. As a result, the parent bank Société Générale decided to sell its Greek subsidiary, Geniki Bank. The resulting negotiations in October 2012 led to the purchase by Piraeus Bank. As part of the transaction, Société Générale agreed to invest a total of ?60 million in the Piraeus Group. This amount consisted of a capital contribution from Société Générale to Geniki Bank for ?90 million and the subscription of a bond issued by Piraeus Bank for an amount of ?70 million. Piraeus Bank subsequently acquired Geniki Bank for ? million (European Commission, 2015) .
In the case of Millennium Bank in Greece, the parent bank, Banco Comercial Portugues (BCP), decided to sell its subsidiary to Piraeus Bank in April 2013. According to the agreement, BCP contributed ?00 million to the recapitalization of MBG by converting existing intra-corporate financing provided by BCP to MBG of ?61 million and the ?39 million invested by BCP in Millennium Bank in December 2012. Piraeus Bank would then acquire a fully recapitalized MBG for ? million. In June 2013, the acquisition of MBG was accomplished (European Commission, 2015) .
c) Other capital banks
For some other small private banks, losses due to NPLs and, in some cases, essential losses from the PSI program created severe previsions that negatively affected the equity capital. Negative equities were so crucial that banks could not meet the capital requirements; therefore, the Bank of Greece ordered the revocation of the license of these banks. Proton Bank, an investment bank with an essential portfolio of Greek bonds, had significant losses due to the PSI program, Table 3, which in conjunction with NPLs, could not meet capital requirements. So in 2014, after the operating license was revoked, FSF, owner of the bank, sold all its shares of Proton Bank to Eurobank for ? (European Commission, 2014) . Before the sale, the FSF had the obligation to cover the capital needs of Proton Bank with an amount of ?95 million.
First Business Bank (FBB) could also not raise the required funds for its recapitalization. Consequently, in 2013, the Bank of Greece decided to sell the bank to the National Bank of Greece. Bank of Greece estimated the financing gap of FBB to be ?57 million, which the FSF paid in the form of FSF bonds (European Commission, 2014a) .
In 2013, the Bank of Greece decided, first, to revoke ProBank’s operating license since the bank’s equity was negative by ?5.9 million, made the bank carry out its recapitalization and then the transfer of the bank’s assets to the National Bank of Greece (Bank of Greece, 2013a, 2013b) .
Panellinia Bank was the capital bank created by Greek cooperative banks and the participation of the German cooperative bank, DZ Bank (Karafolas, 2016) . In 2015, the Bank of Greece decided to revoke Panellinia’s license since the bank was not able to achieve recapitalization. The bank was sold in 2015 to the Piraeus Bank (Bank of Greece, 2015) .
4.2.2. Cooperative Banks
Cooperative banks were forced to appeal to their members or new members to find the necessary capital. Seven cooperative banks failed to raise the necessary capital because they had suffered considerable operating losses, which caused the reduction of equity. Table 4 presents the necessary capital needs estimated by the Bank of Greece in order to meet the requirements of “Basel III”. The problem of non-performing loans appears clearly (in the case of available data).
The non-performing loans were such that the banks under consideration needed considerable sums, given their size, to obtain the necessary capital. In this economic environment, seven cooperative banks did not succeed, and as a result, the Bank of Greece revoked its license to operate.
5. A Radical Change in the Banking Market
The acquisitions of the banks resulting from the revocation of the license and the sales of the subsidiaries created a new landscape in the Greek banking market. From a total of 66 banks of any form in 2009, only 19 banks existed in 2021, Table 5. In particular, for the cooperative banks, the capital requirements caused further changes; Pagritia Bank, the most important cooperative bank, decided in 2020 to transform into a capital bank, losing its character as a cooperative bank. Four other cooperative banks decided to merge; in 2018, the Cooperative Bank of Drama merged with the Cooperative Bank of Evros by absorbing the second, and the Cooperative Bank of Serres merged with the Cooperative Bank of Pieria, creating the Cooperative Bank of Central Macedonia. Thus, at the end of 2022, five cooperative banks with a regional character are operating.
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Table 4. Revocation of License to Operate Cooperative Bank in Greece (amounts expressed in ?illion).
(*) Capital required to be reached according to “Basel III”, estimated by the Bank of Greece. n.a. Not available. Source: Bank of Greece, 2020 , (author’s calculations).
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Table 5. Number of banks in Greece.
Source: Hellenic Bank Association, 2023; Association of Co-operative Banks of Greece, 2023 .
The reduction of banks resulted in the large concentration of the banking sector in four banks, Alpha Bank, Eurobank, National Bank of Greece, and Piraeus Bank. At the end of 2022, these banks had approximately 96% of bank assets in Greece, which presents the highest banking concentration in the European Union (European Central Bank, 2023) . This development allows, to a certain extent, the more significant capital strengthening of banks; conversely, the concentration reduces the possibilities of competition between banks. Most importantly, any adverse development in one or more of these banks, either on capital adequacy or banking activities, will seriously impact the banking system and, by extension, the entire Greek economy.
6. Conclusion
The Greek economic crisis of the 2010s caused a profound change in the entire Greek banking system. Banks faced serious capital adequacy problems because of the negative results they presented in the decade from 2010 to 2020. A question that arises is why the banks reach the point of problematic capital adequacy. Greek banks suffered the consequences of the financial crisis that turned into a prolonged decade-long economic recession. The euphoria in the 2000s and the remarkable growth of loans, especially consumer loans, seriously affected non-performing loans for these same banks. Here, better banking operations management would have brought fewer negative consequences; this is true to an extent. However, the banks’ management policy was significantly affected by the borrowing problems of the Greek state in two ways. The high public debt forced the Greek state to go into borrowing following a rigorous fiscal policy that also brought about the economic recession in the following decade. In addition, the Greek banks participating in the lending of the Greek state were obliged to reduce this lending by half through the PSI program. In several banks, the impairment of Greek bond debt exceeded their capital capacity, causing severe problems in their capital adequacy. In this context, the Greek case differs from other countries.
The lack of capital adequacy resulted in the end of the function of many banks; the four big banks in Greece acquired them. Due to this development, 96% of the total banking assets are held, with approximately the same participation, by just four banks at the end of 2022 (European Central Bank, 2023) . This concentration is worrying, especially since the survival of these banks was possible thanks to public financial support and not the result of profitable banking operations during this period. New banking pillars that will reduce massive banking concentration are essential; however, any attempt should be based on sound banking practices and the necessary capital adequacy. Encouraging signs are emerging for the banking system. Banks now have more robust capital adequacy. Some, such as cooperatives, accept strengthening through mergers. The recent problematic period enforced the supervision policy of banking activities and led to a less aggressive lending policy.
Acknowledgements
Part of the paper refers to the results of a diploma thesis presented for the MSc “Banking-Insurance and Finance” at the University of Western Macedonia, Greece. Authors thank anonymous reviewers for their helpful comments which improved the manuscript.