2015 Bank Capital Report: Greece

Author: | Published: 27 Mar 2015
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1. Bank Supervision


The CRR is directly applicable in Greece from January 1 2014, with the exception of certain provisions which will enter into effect at a later stage. Transitional provisions on the calculation of own funds were put in place by the Bank of Greece (BoG), the local bank regulator, in decision No 114/1/4.8.2014 (Credit and Insurance Committee Decision, CICD).

CRD IV was transposed by law 4261/2014 (the CRD law) and is generally applicable from January 1 2014. Certain provisions will enter into force from January 1 2016. Secondary legislation issued under the previous legal framework will remain in force, to the extent not contrary to the Greek CRD law and the CRR, until replaced by new secondary legislation. The CRD law abolished and replaced law 3601/2007 which, in turn, transposed into Greek law directives 2006/48 and 2006/49.

The Bank of Greece is in charge of supervising credit institutions. As of November 4 2014, the European Central Bank (ECB) took over direct supervision over systemic Greek credit institutions in line with the Single Supervisory Mechanism (SSM). The four Greek systemic banks which fall into the supervising powers of the ECB are Alpha Bank, Eurobank Ergasias, National Bank of Greece and Piraeus Bank.

Smaller Greek banks, such as Attica Bank or certain cooperative banks, remain within the supervisory perimeter of the Bank of Greece.

Investment firms are supervised by the capital markets regulator, the Hellenic Capital Markets Commission (HCMC). For the purposes of this publication we discuss credit institutions only and the BoG's powers.

No major changes are anticipated in the next 12 months as to the allocation of supervisory powers among regulators, other than those relevant to the implementation of the Single Resolution Mechanism (SRM) framework which is still work in progress in Greece.

2. Bank recovery/ bail-in


The deadline for implementation of the BRRD into Greek law was December 31 2014. However, it has not been transposed as such into Greek law to date. The same applies to the implementation of the SRM framework.

Although the BoG has not issued draft regulations or a timeline to implement the BRRD, the bank resolution and recovery framework in Greece is relatively mature and similar to the BRRD in terms of resolution tools. The Greek resolution tools were introduced in 2012 in the context of the Greek financial crisis and were applied in the overall scheme for the consolidation of the Greek banking market.

By way of general rule, Greek credit institutions must draw up and maintain a recovery plan including steps to address any capital shortfall. The details of such plans are provided in the Act of the BoG's Governor No. 2648/2012. The BoG may implement preventative and resolution measures to credit institutions under the CRD law which retained all relevant provisions provided by the previous legal framework.

While at preventative stage, the BoG may request a credit institution to proceed with a share capital increase within specific timeframes. It may also appoint a commissioner to manage the credit institution or grant a mandatory suspension (by extending the relevant deadlines) of certain contractual obligations of the credit institution.

The BoG can, through its Resolution Measures Committee, order resolution measures to safeguard financial and/or systemic stability and depositors trust in the credit institution and overall banking system. The resolution tools provided under the CRD law are: mandatory share capital increase, transfer of business and establishment of a bridge bank.

A bail-in tool is also available under Greek law but in a different context. In 2010, as part of Greece's fiscal adjustment programme under the EU, IMF and ECB, the Greek government established the Hellenic Financial Stability Fund (HFSF), a private law entity mandated exclusively with the recapitalisation of Greek banks. The law establishing the HFSF was amended in early 2014 to provide for a bail-in process as a prerequisite to inject further HFSF funds into Greek banks. The bail-in perimeter entails common shares, preference shares and other tier 1 instruments and subordinated instruments. Those instruments may be written down or converted into common equity.

The CRD law also provides for a winding-up process applying to credit institutions. This is a special insolvency procedure applying to banks instead of the standard bankruptcy process.

3. Buffers


Buffer requirements are set out in the CRD law (articles 121-134) and are applicable as from January 1 2016, with the exception of the systemic risk buffer which the BoG may already implement as from January 1 2015.

Capital conservation buffer: 2.5%

Phase-in process:

January 1 2016 – 0.625%
January 1 2017 – 1.25%
January 1 2018 – 1.875%
January 1 2019 – 2.5%

Countercyclical buffer:

Institution-specific 0-2.5% and, subject to conditions, higher than 2.5%.

The CRD law is broadly in line and reflecting CRD provisions. The BoG is the regulator in charge of determining countercyclical buffers on a quarterly basis, which are published on the BoG website.

Phase-in process:

January 1 2016 – 0.625% max
January 1 2017 – 1.25% max
January 1 2018 – 1.875% max
January 1 2019 – 2.5%

G-SII buffer:

1-3.5% depending on the G-SII category.

There are 5 G-SII categories and the buffer is increased by 0.5% for each respective category (applicable upon instructions of the BoG).

Phase-in process applicable as a percentage of the buffer:

January 1 2016 – 25%
January 1 2017 – 50%
January 1 2018 – 75%
January 1 2019 – 100%

O-SII buffer:

0-2% (applicable upon instructions of the BoG). There are no announcements as to when the BoG will apply the O-SII buffer.

Systemic risk buffer:

At least 1% and increasing by 0.5% multiples. BoG to notify and/or consult EBA when determining a systemic risk buffer in excess of 3% and 5%, respectively (applicable if BoG opts to issue relevant regulations which it can do as from January 1 2015).

4. Call options


To this date, the BoG has not issued specific guidance as to regulatory and/or tax calls on capital.

5. Coupon payment

Restrictions on distributions under the CRD law

CRD law restrictions as to the distribution of profit and calculation of MDAs are similar to those in article 141 of the CRD. The concept of a distribution is defined in Greek law similar to the CRD definition. The calculation of MDAs follows the same formula, i.e. the multiple of a base amount which includes interim and year-end profits by a factor calculated in accordance with the provisions of article 141 of the CRD, reflected in article 131 of the CRD law.

The BoG is entitled to order restrictions to the distribution of profits in accordance with the above whenever the capital requirements ratios and buffers are not duly met by a credit institution.

In addition to the above, legislation put into effect during the Greek financial crisis from 2008 onwards introduced restrictions on the distribution of dividends as a consequence of state aid to Greek banks.

State-aid was provided to Greek banks by means of two legislative tools: the Hellenic Bank Support Plan established by law 3723/2008 and the recapitalisation of Greek banks by the HFSF pursuant to law 3864/2010.

The Hellenic Bank Support Plan

The Hellenic Bank Support Plan was enacted to provide state originated financial assistance to Greek banks by means of three pillars:

  • Pillar I: special preference shares that qualify as tier 1 capital
  • Pillar II: state guarantees to debt instruments issued by the bank
  • Pillar III: special debt instruments issued by the Greek state

The support plan was put in place as a provisional measure with limited duration. However, its timeframes were extended several times to allow for the Greek banks' participation in the programme until June 30 2015 (with respect to pillars II and III).

During the period of a bank's participation in the plan, dividend payouts are limited to up to 35% of distributable profits at the parent company level. Dividend distribution for the financial years ending 2010, 2011, 2012 and 2013 was further restricted to share distributions, excluding repurchase of shares.

Furthermore, while participating in the plan credit institutions cannot buy back their shares to enhance liquidity. This prohibition does not apply to the repurchase of preference equity shares issued as redeemable if the buyback is intended to strengthen core tier 1 capital.

HFSF Recapitalisation

In the context of its participation in the share capital of Greek systemic banks, the HFSF entered into relationship framework agreements with banks and appointed representatives in their corporate bodies. HFSF representatives have veto rights with respect to core business decisions, including dividend distributions.

Furthermore, HFSF capital injections in the form of state originated funds qualifying as state-aid were made on the basis of restructuring plans approved by the EU's competition directorate. In certain cases such plans included restrictions on profit distribution.

In addition, banks may not buy-back own shares without the HFSF's prior approval as long as the HFSF participates in their share capital.

Consequently, because of the special legislative framework that governs Greek banks as a result of the financial crisis, a series of additional restrictions apply to the distribution of profit and hence payment of certain coupons.

6. Credit default swap contracts


Greece has not issued additional rules with regards to the use of credit default swaps or other tools to mitigate credit risk in addition to those in the CRR.

7. Disclosure & reporting


CRR/CRD disclosure rules apply. In parallel, secondary legislation issued by the BoG prior to the transposition of the CRD IV into Greek law applies, but is in transitional phase.

8. Leverage ratio and liquidity coverage ratio

Liquidity

Article 412 CRR allows EU member states to regulate liquidity requirements until an EU-wide framework is put in place. The BoG has not issued relevant secondary legislation for that interim period.

Under the previous legal framework the BoG issued rules on liquidity ratio requirements, relevant reporting obligations and methods of calculation (Act 2614/7.4.2009). To the extent not contrary to the CRR and CRD law those rules still apply and provide for two basic liquidity ratios: a liquidity asset ratio of 20% and a maturity mismatch ratio of -20%.

Leverage

CRR provisions and transitional rules with respect to leverage ratio requirements, calculations and reporting apply directly to Greek credit institutions. The BoG has not issued guidance as to the transitional phase-in of leverage related requirements, or the option to calculate end-of-quarter leverage ratios during transitional periods.

9. Loss absorption features


CRR provisions apply directly to Greek credit institutions.

Secondary legislation issued under the previous regulatory framework and now abolished by transitional secondary legislation required AT1 instruments to have loss absorption features. Those features needed to allow losses incurred during regular business to be absorbed by the original capital or principal and dividends or coupon payments respectively.

This should not inhibit the credit institution from raising additional funds through schemes approved by the BoG. Write-off and conversion into common equity were explicitly stated to be considered as appropriate loss absorption features.

10. Minimal capital


CRR provisions on minimum CET1, tier 1 and total capital ratios, including the relevant phase-in frameworks, apply directly to Greek credit institutions.

Transitional requirements applied for the period January 1 2014 to December 31 2014: CET1 ratio 4.5%, tier 1 ratio 6%, total capital ratio: 8%.

During 2013, when the HFSF undertook the recapitalisation of Greek systemic banks, the BoG issued special capital requirements applicable as from March 31 2013: a 9% core tier 1 ratio and a 6% ratio, which takes into account certain core tier 1 elements (in particular the extent to which total preferred shares and contingent convertible securities, if any, exceed core tier 1 elements), and a total capital ratio of 8%.

11. Pillar 2


No secondary or other legislation has been issued to date pursuant to the CRD IV package. Under the Basel II framework, the BoG's Governor had issued Act 2595/20.8.2007 providing for guidelines as to internal capital adequacy assessment processes (ICAAP) that should be complied with Greek credit institutions.

12. Qualifying capital


By way of general rule, the new CRR provisions on qualifying capital apply directly to Greek banks.

The BoG issued transitional provisions (CICD 114/2014), including grandfathering of certain instruments, in accordance with articles 467, 468, 478, 479, 480, 481 and 486 of the CRR. Those provisions include, among others, progressive deduction percentages for certain items of regulatory capital, the recognition of certain instruments, and additional filters.

By way of general rule, the grandfathering period for the de-recognition of instruments that no longer qualify as own funds is 8 years, starting in 2014. As of January 1 2014 80% remain recognised. This decreases by 10% each year until 2021. As of 2022 instruments that no longer qualify as own funds will be fully de-recognised.

In terms of government debt held by Greek banks, the BoG has not issued guidance as to the inclusion or not of unrealised losses or gains on exposures to central governments classified in the available for sale portfolio in accordance with IAS 39. Consequently, the general transitional framework would apply for instruments measured at fair value (100% deduction of unrealised losses for January 1 2014 to December 31 2017, 100% recognition of unrealised gains from shares, debt instruments and loans classified in the available for sale portfolio).

However, it should be noted that Greek government debt held by private investors, including the Greek banks, underwent a major restructuring in 2012 (the Private Sector Involvement, PSI). Special legislation was enacted to govern the accounting and tax treatment of PSI related losses.

Decisions made by policymakers envisage maintaining a T-bill stock of €15 billion through the end of Greece's fiscal adjustment programme supported by the EU, IMF and ECB. Consequently, Greek banks are not allowed to subscribe for more than €15 billion of T-bills issued by the Greek government.

With respect to deferred tax assets (DTAs), Greek law introduced a number of measures which apply to Greek credit institutions, allowing the conversion of certain DTAs into directly enforceable credits against the Greek state (DTCs).

Entering or exiting from such conversion mechanism (the DTC mechanism) is optional, subject to shareholder approval and following a recommendation by the board of directors.

DTAs can be converted from 2015 onwards, allowing banks to offset the DTCs against their corporate income tax liability, including corporate income tax liabilities of group associated entities, as the case may be.

All four systemic banks have made use of the DTC mechanism following approval at their respective shareholders' general meetings held at the end of 2014.

In terms of the grandfathering structure for the de-recognition of DTAs, the grandfathering period for DTAs existing prior to January 1 2014 extends to 2023 with a 10% progressive de-recognition rate being applicable each year.

13. Regulatory intervention


In recent years (2012-2014), because of the Greek financial crisis, the BoG exercised its regulatory intervention powers with respect to a number of Greek banks and cooperatives.

The BoG used mainly two resolution tools to deal with failing institutions, i.e. the bridge bank tool (applied to Hellenic Postbank and Proton Bank) and the transfer of business tool (applied to Agricultural Bank, T-Bank, First Business Bank, Pro-Bank and most of the cooperatives).

Both of these structures involve the transfer of assets and liabilities from the credit institution to another bank (whether existing or set up to that effect as bridge entities) and the initiation of a winding-up process for the transferor bank.

The power to initiate this process lies with the BoG, but the funds required to complete the transfers, in the form of a mandatory sale and purchase transaction, come from the DIGF or HFSF. The HFSF (on behalf of the Deposits and Investments Guarantee Fund (DIGF), for as long as the DIGF didn't have, in practice, available funds) covers the funding gap between the transferred assets and liabilities and maintains a preferential ranking privilege over the creditors of the transferor credit institution for such amount.

The HFSF was the sole shareholder of the bridge banks established in the context of such resolution measures and provided to such banks the capital required to meet the relevant regulatory thresholds.

Implementation of the measures led to a significant consolidation of the Greek banking sector. The four systemic banks (Alpha Bank, Eurobank Ergasias, National Bank of Greece and Piraeus Bank) acquired assets of failing institutions or the shares of bridge banks and used the relevant HFSF funding to enhance their capital position.

To date, the winding-up of the credit institutions placed in liquidation is not yet completed. A series of practical issues were raised during the liquidation process, the most material of which being the management of the non-performing loan portfolios left with the liquidators.

As mentioned above, the BRRD has yet to be transposed into Greek law. Given the extensive application of resolution measures in Greece prior to the entry into force of the BRRD one may not expect many of the tools under the BRRD to be applied in practice in the near future. However, supervision and monitoring processes may change in view of the requirement to transpose the SRM framework.

14. Stress tests


In 2014 Greek systemic banks (Alpha Bank, Eurobank Ergasias, National Bank of Greece and Piraeus Bank) participated in two stress tests: a domestic one by the BoG as an update of a similar exercise in 2012, and the EBA/ECB test and AQR, the results of which were announced in late October 2014.

The BoG domestic stress test completed in March 2014 and thus preceded the EBA/ECB one, triggering capital raising processes for all four participating banks. They were recapitalised by the end of H1 2014. Both the BoG and the ECB have made test results and methodology available on their websites .

15. Tax treatment

Tax on interest payments

Interest on debt instruments paid by issuers subject to Greek tax (Greek residents or foreign entities with a permanent establishment in Greece) is taxed as follows:

  • Interest payments to foreign individuals or to foreign legal entities which do not maintain a permanent establishment in Greece for tax purposes are subject to Greek withholding tax of 15%, subject to more favourable provisions of any applicable double tax treaty and EU legislation.
  • Interest payments to Greek tax residents are subject to a 15% income tax which exhausts their tax liability for this type of income. For interest payments made through a Greek paying or other similar agent the tax will be withheld by the agent. Assuming no Greek paying agent is involved the 15% tax is remitted under the annual income tax return filed by the individual.
  • Interest payments to legal entities that are Greek tax residents or maintain a permanent establishment in Greece for tax purposes are subject to a 15% withholding tax which does not exhaust their tax liability. Such income will be treated as part of their annual income and will be taxed at the prevailing corporate income tax rates (flat 26% if the entity maintains double entry books, or at a tax scale if it has single entry books). The tax withheld will be offset against the income tax due. If interest payments are made through a Greek paying or other similar agent, the tax will be withheld by the agent in which case the tax liability of the recipient will not be exhausted for the specific income.

Capital gains tax

Gains realised from the sale of bonds issued by Greek issuers as well as by issuers which have their seat in a European Union, European Economic Area, or the European Free Trade Association jurisdiction are exempted from Greek capital gains tax.

Tax on write down

Greece has no provisions for the tax treatment of write down of bank capital instruments and there are no precedents from which guidance can be drawn. Furthermore, the tax treatment of the instruments may be affected by their accounting treatment under IFRS (debt or equity classification), although tax and accounting treatment are not always aligned in Greece.

If the write down is treated by the tax authorities as realised gains , it will be taxed at the standard income tax rate for banks of 26%. If the debt instrument is converted into shares for the nominal value of the debt issued, the conversion should be tax neutral. If the instrument is converted into shares for a lower than the nominal value of the debt instrument, the bank could be considered as having realised a gain, which would in principle be taxable at the general tax income rate (26%).

According to recent legal literature, income tax should not apply to corporates placed in insolvency processes where the supervising authority (ie the court) orders write down of debt. One would envisage a similar approval for write downs ordered by the banking regulator.

16. Mutuals and Sifis


To date the BoG has not issued guidelines or other acts qualifying domestic credit institutions as G-SIIs, O-SIIs, or Sifis.

Mutuals fall in the scope of the CRD law which includes a series of provisions to that effect, but no secondary legislation has been issued specifically with respect to mutuals.

About the author
 

Christina Papanikolopoulou
Partner, Kyriakides Georgopoulos

E: ch.papanikolopoulou@kglawfirm.gr
main: +30 210 817 1500
direct: +30 210 817 1630
fax: +30 210 685 6657

Christina's main areas of practice are debt and equity capital markets, bank financing, securitisation and structured finance and regulation of financial institutions.

Christina has led the KG team on various securities offerings by banks and other companies listed on the Athens Exchange as well as on accelerated bookbuildings and similar transactions.

She has advised clients on securitisation and covered bond transactions launched by Greek originators. She provides advice to financial institutions regarding their day-to-day operations and specialised projects with emphasis on transactions where international partners are involved.


About the author
 

Kely Pesketzi
Associate, Kyriakides Georgopoulos

E: k.pesketzi@kglawfirm.gr
main: +30 210 817 1500
direct: +30 210 817 1635
fax: +30 210 685 6657

Kely's area of practice is focused on banking and finance. She has been involved in a number of structured and project finance transactions, equity and debt offerings, as well as corporate restructurings. Kely provides day to day advice on securities law and banking regulation and has an academic background on trusts and comparative tax law.


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