The recapitalization of Greek banks

Because of the impending haircut on Greek government bonds, and of the large fraction of non-performing loans, Greek banks are likely to be insolvent on aggregate. Calls for increased state ownership of the banking system as a long-run solution to the problem should be resisted: state control distorts lending decisions of banks and hinders their effective regulation. Data on Greek banks’ holdings of Greek government bonds confirm the costs of state influence. Recapitalization should proceed promptly as follows. Solvent banks should be required to meet their Basel capital ratios, and in a way that involves not only asset sales but also injections of fresh capital. Banks that are insolvent but not deeply so should continue operations, existing equity should be set to zero, and capital ratios should be restored through injections of capital. In either case, existing equity holders should be given the chance to provide the necessary capital before public funds are injected. The process should be monitored carefully by the troika to ensure good corporate governance in the banks that receive public funds. Banks that are deeply insolvent should be liquidated through a good bank/bad bank scheme.

This article has been written by Peter Dalianes and Dimitri Vayanos. The full article here. A shorter version of the article titled “Greek banks and the state” in Kathimerini newspaper here.

About D_Vayanos

London School of Economics

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One Response to The recapitalization of Greek banks

  1. Thank you for this constructive article! It was good to read, for once, a real analysis of alternatives instead of simply shouting “the ECB has to recapitalize Greek banks”.

    I like your idea of debt-equity-swaps very much. Let me suggest another, much less sophisticated alternative.

    Greek banks have, in sum, about 45 BN EUR equity. That’s about half of the nominal amount of Greek bonds they own. Greek savers hold about 180-190 BN EUR in domestic savings.

    Suppose you mandate Greek banks to write-down the value of their sovereign debt holdings to half of nominal. That would wipe out their equity but they then should be reasonably solid banks. I may be wrong with the latter but, if not, one could propose to Greek savers that they convert about 45 BN EUR of their savings into bank shares. They would then be the owners of reasonably solid banks which might even pay higher dividends than the interest they presently paying. And who knows? The shares might even increase in value once this present crisis is over!

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