The banking sector in Greece remains healthy, adequately capitalized, and highly profitable, according to the International Monetary Fund's (IMF) 2007 Article IV Consultation. While the banking system is relatively concentrated in comparison to the European Union (EU) average, the number of state-controlled banks has decreased as a result of the far-reaching privatization program in Greece, notes the U.S. Department of Commerce's (DoC) 2008 Country Commercial Guide. According to the IMF's 2006 Financial System Stability Assessment of Greece's compliance with the Basel Core Principles (BCPs) for Effective Banking Supervision, the Greek supervisory regime is largely compliant with the BCPs. Per the IMF's 2006 report, the Greek supervisory regime is essentially sound, and was found to be in full compliance with twenty-two BCPs; largely compliant with eight; and materially non-compliant with one BCP. In addition, the IMF’s assessment highlights the progress in the legal framework for banking supervision over the past decade, as well as steps taken to fully incorporate all EU directives into Greek Law. Shortcomings were identified with regards to the legal protection of supervisors, the supervision of credit and provisioning, the monitoring of risk management methodologies, accounting and auditing standards, and the anti-money laundering and combating the financing of terrorism framework. Responding to the IMF’s assessment, Greece's banking supervisory authority—the Bank of Greece—noted that it would be addressing these weaknesses with amendments under way or planned measures to bring Greek regulations in line with the IMF recommendations. The Basel II framework was scheduled to be introduced in March 2008, according to the IMF's 2007 Article IV Consultation.

General Overview

The International Monetary Fund (IMF) conducted a Financial System Stability Assessment in January 2006, including a report on Greece's compliance with the Basel Core Principles (BCPs) for Effective Banking Supervision. The report finds that the Greek supervisory regime is essentially sound, achieving full compliance with twenty-two of the thirty BCPs (with Principle 1 being divided into 6 sub principles). Eight principles were assigned a "largely compliant" rating, and one principle was found to be “materially non-compliant”. Shortcomings were identified with regards to the legal protection of supervisors, the supervision of credit and provisioning, the monitoring of risk management methodologies, accounting and auditing standards, and the anti-money laundering (AML) and combating the financing of terrorism (CFT) framework. Responding to the IMF’s assessment, the Bank of Greece (BoG) noted that it would address these weaknesses "with measures that have either already been undertaken or are planned for the near future" (p. 38).

The BoG—the central bank of Greece— is the only banking supervisory authority, which is empowered to carry out effective supervision, including authorization and license revocation. According to the IMF's 2006 report, "the legal environment within which the banking system operates in Greece is broadly satisfactory" (p. 35). The IMF report further notes that Greece has taken steps to fully incorporate all European Union (EU) directives into Greek Law. As stated in the IMF's subsequent 2007 Article IV Consultation, the Basel II framework was scheduled to be introduced in March 2008, through the implementation of the EU Capital Requirements Directives No. 2006/48/EC and No. 2006/49/EC. Pursuant to the White Paper on Financial Services Policy for 2005-2010, the EU Commission continues to monitor regulatory activity and prudential supervision in Europe.

The banking sector in Greece is relatively concentrated in comparison to the EU average, with the top five banks accounting for 65 percent of total assets in 2004, as stated in the IMF's 2006 report. According to the U.S. Department of Commerce's (DoC) 2008 Country Commercial Guide, the number of state-controlled banks has decreased to three, as a result of the far-reaching privatization program in Greece. The U.S. DoC report highlights that "private banks in Greece are in good financial health and are expanding market share." In 2007, per the same report, private domestic and foreign banks held about 70 percent of total banking assets. Total combined assets of the top five banks were estimated at 220 billion dollars.

The banking sector in Greece remains healthy, adequately capitalized, and highly profitable, according to the IMF's 2007 Article IV Consultation. In its 2007 Annual Report Summary, the BoG emphasizes that while the ratio of non-performing loans (NPLs) to total loans declined from 5.4% in 2006 to 4.5% in 2007, it is still well above the EU average. In addition, the capital adequacy ratio (CAR) level continues "to provide a satisfactory margin for ensuring banking system stability and is still close to the level recorded for large banks in the EU" (p. 18). The BoG's 2007 report further states that market risk remained relatively low in 2007, and that liquidity ratios remained at satisfactory levels at the end of 2007, despite considerable volatility.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

II

The BoG acts as the central bank of Greece, and is the only banking supervisory authority. According to the IMF's 2006 report, "the BoG has all the powers that it needs to carry out effective supervision (including authorization and license revocation)" (p. 36). However, there is insufficient information publicly available regarding Greece’s compliance with this principle.

1.(2) Operational independence and adequate resources.

II

The IMF's 2006 report states that "the BoG has all the powers that it needs to carry out effective supervision (including authorization and license revocation), is appropriately resourced, [and] has the necessary independence" (p. 36). However, there is insufficient information publicly available regarding Greece’s compliance with this principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

II

According to the IMF's 2006 report, "the legal environment within which the banking system operates in Greece is broadly satisfactory" (p. 35). The IMF report further notes that Greece has taken steps to fully incorporate all EU directives into Greek Law. However, there is insufficient information publicly available regarding Greece’s compliance with this principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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See Principle 1.(3).

1.(5) Legal protection for supervisors.

ID

The IMF's 2006 report highlights that the BoG and its staff may lack "necessary legal protection against lawsuits for undertaking their work in good faith and without negligence" (p. 36). Per the IMF report, it is recommended that this issue be addressed. Responding to the IMF’s assessment, the BoG notes that it has submitted the second draft proposal on legal protection to the Ministry of Economy and Finance, with the aim of providing "protection to supervisors against legal actions brought by third parties in response to regulatory and supervisory measures adopted in good faith in the performance of their duties" (p. 39).

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

II

The IMF's 2006 report states that the BoG "does cooperate effectively with other supervisors, both at home and abroad" (p. 36). However, there is insufficient information publicly available regarding Greece’s compliance with this principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

II

The IMF's 2006 report states that the activities of banks are clearly defined under the banking laws. In addition, the use of the word 'bank' is "reasonably well-controlled" (p. 36). However, there is insufficient information publicly available regarding Greece’s compliance with this principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

II

According to the IMF's 2006 report, "the banking laws provide a robust regime under which the activities of banks can be clearly defined" (p. 36). However, there is insufficient information publicly available regarding Greece’s compliance with this principle.

4. Authority to review and reject transfer of ownership.

II

The IMF's 2006 report states that ownership changes of banks are controlled under the banking laws. However, there is insufficient information publicly available regarding Greece’s compliance with this principle.

5. Authority to review major acquisitions and investments.

II

Pursuant to the banking laws, "the BoG can ensure that major investment decisions of banks have to receive its approval" (p. 36), as stated in the IMF's 2006 report. In addition, Greek authorities have established a comprehensive regime for the authorization of banks. However, there is insufficient information publicly available regarding Greece’s compliance with this principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

FC

The IMF's 2006 report states that the capital adequacy regime in Greece is compliant with the BCPs. The minimum capital adequacy ratio of 8 percent has been raised to 9 or 10 percent for some commercial banks. In addition, a ratio of 10 percent applies to all cooperative banks. While the CAR of Greek banks declined from 12.2% in 2006 to 11.2% in 2007, according to the BoG's 2007 Annual Report Summary, the CAR level continues "to provide a satisfactory margin for ensuring banking system stability and is still close to the level recorded for large banks in the EU" (p. 18). The EU Capital Adequacy framework, in accordance with the EU Directives No. 2006/48/EC and No. 2006/49/EC, was incorporated into Greek law through the enactment of the Banking Law No. 3601 of 2007. The Basel II framework was scheduled to be introduced in March 2008, according to the IMF's 2007 Article IV Consultation.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

II

While the supervision of credit and provisioning is broadly satisfactory, as stated in the IMF's 2006 report, there is a need for more detailed guidelines for supervisors on these policies. The IMF recommends making guidelines on credit supervision more specific. Responding to the IMF assessment, the BoG notes that it is putting in place manuals for both on-site and off-site supervisory processes with the aim of providing "formal guidelines with procedures and measures aimed at controlling banks' credit risks on a consistent and uniform basis" (p. 39). The manuals are expected to ultimately incorporate guidelines of the Committee of European Banking Supervisors for the convergence of supervisory practices towards Basel II implementation. Upon request of the BoG, according to its 2007 Annual Report Summary, banks are required to further improve the quality of their loan portfolios by tightening their credit standards. The BoG report notes that the implementation of the specific provisions under Pillar 2 of Basel II will help in this direction. Despite the above information, none of the reports mentioned above explicitly address Greece’s compliance with this principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

II

While the supervision of credit and provisioning is broadly satisfactory, as stated in the IMF's 2006 report, there is a need for more detailed guidelines for supervisors on these policies. The IMF recommends developing "a robust provisioning regime, in the context of the [International Financial Reporting Standards] IFRSs framework" (p. 38). Responding to the IMF assessment, the BoG notes that it has issued the Governor's Act on the Adequacy of Loan Loss Provisions for Claims Arising from Lending No. 2565 of 2005 "to more closely align provisioning policy with respective credit risk exposures" (p. 39). According to the BoG's 2007 Annual Report Summary, while the ratio of NPLs to total loans declined from 5.4% in 2006 to 4.5% in 2007, it is still well above the EU average. Despite the above information, none of the reports mentioned above explicitly address Greece’s compliance with this principle.

9. Prudential limits and management information system on concentration of exposure.

II

The IMF's 2006 report states that lending concentrations in Greece are subject to "adequate regulations and controls" (p. 37). However, there is insufficient information publicly available explicitly addressing Greece’s actual compliance with this principle.

10. Arm's length rule and monitoring for connected lending.

II

According to the IMF's 2006 report, Greece has "adequate regulations and controls over connected lending" (p. 37). However, there is insufficient information publicly available explicitly addressing Greece’s actual compliance with this principle.

11. Policies and procedures for country risk and transfer risk.

II

The IMF's 2006 report states that the BoG has established appropriate supervisory requirements for the supervision of country risks. However, there is insufficient information publicly available explicitly addressing Greece’s actual compliance with this principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

II

The IMF's 2006 report states that the BoG has established appropriate supervisory requirements for the supervision of market risks. The IMF recommends developing "more frequent reporting on portfolios subject to market fluctuations" (p. 38). According to the BoG's 2007 Annual Report Summary, market risk remained relatively low in 2007. Despite the above information, none of the reports mentioned above explicitly address Greece’s compliance with this principle.

13. Comprehensive risk management processes.

II

As part of the IMF's 2006 report, it is recommended that the BoG monitor developments in the market regarding risk management methodologies. In addition, the BoG's overall risk assessment should be extended to cover non-credit risks, including market risk, liquidity risk, and operational risk, in a more comprehensive manner. Responding to the IMF assessment, the BoG notes that it has issued the Governor's Act on Liquidity Requirements of Credit Institutions No. 2560 of 2005, with the aim of "introducing compulsory liquidity and asset mismatch ratios and formalizing the framework for the monitoring of liquidity" (p. 39). According to the BoG's 2007 Annual Report Summary, while liquidity ratios showed considerable volatility in 2007, liquidity ratios remained at satisfactory levels at the end of 2007. It is noted in the IMF's subsequent 2007 Article IV Consultation that the BoG has responded to banks’ increased exposure to credit, country, and liquidity risks "by increasing provisioning requirements, seeking a tightening of lending standards, and stepping up cross-border banking supervision" (p. 53). Despite the above information, none of the reports mentioned above explicitly address Greece’s compliance with this principle.

14. Adequate internal controls.

II

The IMF's 2006 report states that "supervision of internal controls is also effective" (p. 37). Per the IMF report, it is recommended that the positions of chairman and chief executive officer be separated. Responding to the IMF assessment, the BoG notes that it has began revising and complementing the Governor's Act on Credit Institutions' Internal Control Systems and Processes No. 2438 of 1998, with the aim of explicitly stating "the compliance functions, the conflicts of interest issue, as well as guidelines on specific risk areas" (p. 39). Despite the above information, the 2006 IMF report does not explicitly address Greece’s compliance with this principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

II

While supervision of anti-money laundering (AML) activities is generally sound, according to the IMF's 2006 report, there is a need to transpose the latest recommendations of the Financial Action Task Force (FATF) into Greek law. The IMF report states that "the current AML/CFT [combating the financing of terrorism] regime is not working in a cohesive manner consistent with the requirements of the FATF recommendations" (p. 57). In particular, resources devoted to AML/CFT activities are limited. The IMF underlines that a number of legal, institutional, and structural actions are required in order for Greece to achieve compliance with the FATF recommendations.

The 2007 FATF report states that “there are deficiencies in AML/CFT supervision in the banking area and, to a more severe extent, in the securities sector” (p. 6). Customer due diligence requirements in Greece are lacking and not in line with the international standards per the report. Similarly, the report states that “given the size and increasing sophistication of criminal activity in Greece, the total number of suspicious transactions reports appears low, with virtually none from outside the banking sector” (p. 6). However, the report notes that recently the BoG has taken measures to introduce more comprehensive requirements for the financial institutions under its supervision. As reported in the IMF's 2007 Article IV Consultation, measures have been taken to address deficiencies that were identified in the legal and supervisory framework by the FATF’s 2007 Third Mutual Evaluation Report. In this regard, the IMF's 2007 report recommends that Greek authorities "intensify efforts to achieve prompt compliance with the FATF standards" (p. 12). Despite the above information, none of the reports mentioned above explicitly address Greece’s compliance with this principle.

16. Effective supervisory system consisting of on-site and off-site supervision.

II

The IMF's 2006 report states that "on-site work is thorough and professional and off-site analysis is also generally satisfactory" (p. 37). In addition, on-site and off-site personnel collaborate effectively. It is recommended that more resources be allocated to on-site supervision, and that internal control systems be reviewed more frequently. Responding to the IMF assessment, the BoG notes that it has hired new personnel to reinforce both the on-site and off-site supervision departments. Despite the above information, the 2006 IMF report does not explicitly address Greece’s compliance with this principle.

17. Regular contact with bank management and understanding of bank's operations.

II

The IMF's 2006 report states that "the information that the BoG obtains for its supervision is adequate" (p. 37). While contact with bank management is deemed appropriate, per the same report, more time should be spent with management and directors. Despite the above information, the 2006 IMF report does not explicitly address Greece’s compliance with this principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

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There is insufficient publicly available information to address Greece's compliance with this principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

II

The IMF's 2006 report states that "the information that the BoG obtains for its supervision is adequate" (p. 37). The IMF report recommends establishing "a more structured regime for contacts with external auditors" (p. 37). Internal control systems should also be reviewed more frequently. Nevertheless, the available sources do not directly address Greece's compliance with this principle.

20. Ability to supervise on a consolidated basis.

II

There is insufficient publicly available information to address Greece's compliance with this principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

II

While information requirements are deemed appropriate, according to the IMF's 2006 report, there is a need to strengthen the collection and publication of economic data. The analysis of bank risks should also comprise total risks facing the banks. The IMF’s report notes that banks have delayed their publication of financial statements in part because of the introduction of IFRSs. Greek banks have begun introducing IFRSs, but the latter still needs to be fully implemented across the whole economy. At the time of the IMF’s assessment, there were no Greek auditing standards. International auditing standards were expected to be applied by 2007. Despite the above information, the 2006 IMF report does not explicitly address Greece’s compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

II

The IMF's 2006 report states that "the formal powers of the BoG are fully adequate and there is evidence that these are used effectively" (p. 37). It is recommended that contingency plans be introduced to resolve problem bank situations. Responding to the IMF’s assessment, the BoG notes that it has been preparing a manual for Contingency Planning Arrangements containing all internal crisis management procedures. Despite the above information, the 2006 IMF report does not explicitly address Greece’s compliance with this principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

FC

The IMF's 2006 report states that "both the legal environment and practice [with regards to this principle] are fully satisfactory" (p. 38). With regards to Greek banks' exposure abroad, the IMF's subsequent 2007 Article IV Consultation reports that "the BoG has adopted a risk-based, multilayer supervisory framework, which includes on-site examinations and setting country limits" (p. 12).

24. International exchange of information with other supervisors.

FC

The IMF's 2006 report states that "both the legal environment and practice [with regards to this principle] are fully satisfactory" (p. 38). In 2006, the BoG signed a memorandum of understanding (MoU) with the central bank of the Former Yugoslav Republic of Macedonia to strengthen cooperation with foreign supervisory authorities, as highlighted in the BoG's 2006 Annual Report. At the time of the BoG's 2006 report, an MoU was also in preparation with the central bank of Egypt, with whom the BoG cooperates as part of the MEDA Programme on Banking Supervision (Euro-Mediterranean Partnership).

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

FC

The IMF's 2006 report states that "both the legal environment and practice [with regards to this principle] are fully satisfactory" (p. 38).