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GREECE FACES BANKING INDUSTRY COMPLIANCE CHALLENGES AMID GLOBAL TURBULENCE

Bank of Greece Warns of Compliance Challenges for Greek Banking Sector

The Bank of Greece (BoG) has issued a warning that the country’s banking sector is facing significant compliance challenges as it navigates a highly volatile international financial environment. In its Financial Stability Review, released on Thursday, the BoG highlighted pressing challenges faced by banks, including improving asset quality and capital adequacy.

Key Risks to Financial Stability

  • Persistently high levels of inflation: The review cited persistently high levels of inflation as a key risk to financial stability.
  • Geopolitical tensions: Geopolitical tensions are also seen as a significant risk to financial stability.
  • Emerging vulnerabilities in the European Union’s commercial real estate market: The BoG flagged emerging vulnerabilities in the European Union’s commercial real estate market as another key risk.

Greek Banks’ Progress and Challenges

Greek banks have made progress in resolving their legacy stock of non-performing loans (NPLs), with the NPL ratio declining to 8.7% in December 2022. However, this remains significantly above the European average. The BoG warned that inflation and economic slowdown could lead to a new wave of NPLs, highlighting the need for banks to step up their efforts to achieve further convergence.

Banking Sector Performance

Greek banks returned to profitability in 2022, with a further increase in operating income expected in 2023. However, the ECB’s interest rate hikes are set to boost funding costs, which could mute the impact on net interest income in the medium term.

Capital Adequacy and Compliance

Capital adequacy of banking groups strengthened considerably in 2022, with the Common Equity Tier 1 (CET1) ratio rising to 14.5% and the Total Capital Ratio (TCR) increasing to 17.5%. The recent turbulence in the US and Swiss banking systems has brought to the fore the need for a complete banking union, according to the BoG.

Way Forward

  • Establishment of a European Deposit Insurance Scheme (EDIS): The BoG sees the establishment of EDIS as crucial for strengthening financial stability.
  • Prudent economic policies: Prudent economic policies are seen as essential for Greece to insulate itself against risks and achieve investment grade, which would further consolidate confidence in the economy and strengthen financial stability.