Coordination problems, perverse incentives and the key to Greek recovery: the Greek banking system

Greek banks, like their international peers, have not simply faced the unfortunate consequences of an externally imposed crisis. Coordination problems and perverse incentives in the banking sector, often exacerbated by short-termism in government policies and objectives, led to perpetuation of macroeconomic imbalances and higher overall risk in the economy. Greece is currently in an inefficient, self-reinforcing cycle of tightening credit conditions and economywide recession. Policy initiatives to improve credit conditions and increase the lending capacity of the Greek banking system should complement government efforts to restore its fiscal position. Catalyzing new lending in the economy would require policy initiatives along three dimensions: (1)  Maintaining support to the banking system, but with an explicit mechanism for sharing the benefits of such support with the real economy, (2)  Promoting more efficient risk-sharing between the public and the banking sector, in the spirit of public-private partnerships (PPPs) and revolving financing facilities, and (3)  Sponsoring the creation of a market mechanism to enhance the credit quality and ratings of bank-issued paper, such as asset backed  securities (ABS). That would facilitate banks accessing market funding and gradually weaning off the ECB window.

This article has been written by Spyros Pagratis. The full article here.

About S_Pagratis

Athens University of Economics and Business

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6 Responses to Coordination problems, perverse incentives and the key to Greek recovery: the Greek banking system

  1. @spyros:

    Congratulations for this post and for the Greek Economists for Reform initiative in general. It is a breath of fresh air. I do have one objection to one of your responses above:

    And capital levels of Greek banks are among the highest in the EU, with the National Bank of Greece, for example, being at the top-end.

    If this were truly the case, Greek banks would be able to borrow from abroad, which in general terms they are not. They will only be well capitalised in the eyes of potential creditors when it is clear that they can survive a reasonable (haircut = 30%? 50%?) Greek sovereign default. The only exceptions to this rule are institutions such as the ECB that have a mandate to provide liquidity.

    If we can’t discuss the 500 pound gorilla pooping all over the banks’ balance sheets then there’s no point talking about solvency.

  2. Γιαννης says:

    Κύριε Παγκράτη,

    Είχα έναν προβληματισμό αυτές τις μέρες για το κατά πόσο θα μπορέσει το τραπεζικό σύστημα να ανταπεξέλθει κατά την διαρκεία του 2011.Ο δημόσιος τομεας και συγκεκριμένα οι δημόσιοι υπάλληλοι κατέχουν σε ποσοστό 20% του συνόλου δάνεια (στεγαστικά κυρίως).Το επερχόμενο ομως 2011 αναμένεται να επιφέρει σημαντικές αλλαγές στους μισθούς του δημόσιου βάσει του μνημονίου όπως επίσης και πολλές απολύσεις (κατι το οποίο ειναι μονόδρομο αλλά το διαψεύδουν κατηγορηματικά) . Αλλαγές στους μισθούς τους όμως θα τους εφερνε σε δυσμενή θέση για κάλυψη των υποχρεώσεων τους αρα και πιθανή αδυναμία κάλυψης της δόσης.Μήπως αυτό θα μπορούσε να θεωρηθεί ως ένας νεος κίνδυνος για το τραπεζικό σύστημα?Υπάρχει περίπτωση να δούμε στην αγορά ενα domino effect και να έχουμε σημαντικές απωλειες στον τραπεζικό τομεα?

    Γιαννης,
    Φοιτητης ΑΣΟΕΕ,Οικονομικής Επιστήμης.

  3. Βαγγέλης says:

    Dear Spyros,

    I can only agree that the greek banks do have some advantages,especially their private network outside Greece,but this network seems that is currently more or less for sale (Finansbank,Eurobank in Poland etc) in order to support the mother companies.

    Moreover,one cannot ignore that the Greek banks now look like” zombie banks “(The term was first used by Edward Kane in 1987), their dependence from ECB (96 billions or more?) and the Greek governmental help pack is strong.I think that their dependence from ECB and ECB’s future position on this matter, is the main issue nowadays .It is more than welcome to have help in the form of the credible pillar,but what if you cannot survive without crutches?

  4. Spyros Pagratis says:

    Dear Vaggeli,

    Leverage of Greek banks is significantly lower than their international peers. This is partly because the Greek banking system started catching up with international trends in customer lending not before 2003. Luckily enough, Greek banks have not had sufficient time to build up high leverage. This is in contrast to other EU banks that funded a large proportion of their lending through money markets and securitisations.

    Hence, the proportion of customer loans that Greek banks are funding from sources other than customer deposits (the so called “funding gap”) has been at the low end compared with other EU banks. And capital levels of Greek banks are among the highest in the EU, with the National Bank of Greece, for example, being at the top-end.

    Moreover, the ECB provides a strong and credible pillar of systemic support, where Greek banks are privileged having direct access to (in contrast, lets say, to UK banks). Last but not least, Greek banks have a significant diversification of their operations in the broader region (e.g. Southeastern Europe). Such diversification is a strong “asset” for Greek banks and has already started paying-out (e.g. Financebank).

    My view is that, despite the current turbulence, the Greek banking system has entered the crisis from a strong position, and has demonstrated high level of resilience. But I agree with you that significant challenges remain (especially on banks getting access to market funding) and concerted action is required in this direction.

    Best regards,
    Spyros

  5. Βαγγέλης says:

    Is it possible to save a banking system with such huge leverage?

    Question is not only for the Greek banking system,is for the banking system as a whole.

    Banks are used to lend money that they don’t have,depositors are now in need for their money so they withdraw,the economy is going bad so the companies are not able to pay the loans.Can this end up in a nice way?

    • Spyros Pagratis says:

      Dear Vaggeli,

      Leverage of Greek banks is significantly lower than their international peers. This is partly because the Greek banking system started catching up with international trends in customer lending not before 2003. Luckily enough, Greek banks have not had sufficient time to build up high leverage. This is in contrast to other EU banks that funded a large proportion their lending through money markets and securitisations.

      Hence, the proportion of customer loans that Greek banks are funding from sources other than customer deposits (the so called “funding gap”) has been at the low end compared with other EU banks. And capital levels of Greek banks are among the highest in the EU, with the National Bank of Greek being at the top-end.

      Moreover, the ECB provides a strong and credible pillar of systemic liquidity support, where Greek banks are privileged having direct access to (in contrast, lets say, to UK banks). Last but not least, Greek banks have a significant diversification of their operations in the broader region (e.g. Southeastern Europe). Such diversification is a strong “asset” for Greek banks and has already started paying-out (e.g. Financebank).

      My view is that, despite the current turbulence, the Greek banking system has entered the crisis from a strong position, and has demonstrated a high level of resilience. But I agree with you that significant challenges remain (especially on banks getting access to market funding) and concerted action is required in that direction.

      Best regards,
      Spyros

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