Results of the EU-wide stress testing exercise

Introduction

The 2011 EU Wide Stress Testing Exercise of European Banks was conducted under the coordination of the European Banking Authority (EBA), in cooperation with national supervisory authorities, the European Central Bank (ECB), the European Commission and the European Systemic Risk Board. The 6 largest Greek banking groups (National Bank, EFG Eurobank, Alpha Bank, Piraeus Bank, ATEbank and Hellenic Postbank), representing over 90% of the total assets of the Greek banking system (excluding foreign subsidiaries), participated in the exercise.

With regard to the threshold and the capital ratio two key features distinguish this year’s exercise from that performed last year: First, the threshold was set at 5% this year compared with 6% last year. Second, the definition of capital used for this year’s exercise was a Core Tier 1 capital ratio, compared with a Tier 1 capital ratio used in last year’s exercise. The scenarios were specified by the ECB and cover a time horizon of two years (2011-2012). An adverse scenario was considered, reflecting extreme tail risks (of the ‘what if’ type). Another important difference compared with last year’s exercise is that in the present exercise claims against central governments that are recorded in the banking book were also assessed under stress using a methodology similar to the one applied to other credit portfolios (corporate, mortgage and consumer loans). The starting point of the exercise is the balance sheet data as of 31.12.2010.

The consistent application of the methodology and the reliability of the results were reinforced by a peer review. Experts from supervisory authorities of several countries in Europe, working together with EBA and ECB staff assessed, the quality of the data used and the results of the exercise.

Assumptions and results of the adverse scenario

In column 1 of the table, the Core Tier 1 ratio is calculated taking into account measures that institutions undertook in the period up to 30 April 2011. These actions consist exclusively of equity increases that were fully committed, government support and mandatory restructuring plans approved by the European Commission. Column 1 does not take into account generic provisions and measures taken or announced after 30 April 2011.

For the 6 Greek banking groups considered as a whole, the results of the exercise (column 1) indicate, by the end of 2012, a capital surplus of € 2,44 billion above the amount that corresponds to the Core Tier 1 capital ratio threshold of 5%.

Under the adverse scenario, before taking into consideration additional mitigating measures, four out of the six Greek banks come in above the 5% threshold -- National Bank, Alpha Bank, Hellenic PostBank and Piraeus Bank. One bank -- EFG Eurobank – comes in marginally below the 5% threshold and another -- ATEbank – comes in significantly below the 5% threshold.

Column 2 gives a more representative picture of banks’ capital position, as the calculation of the Core Tier 1 ratio takes also into account:

- additional mitigating measures taken or planned (e.g. sales or mergers of subsidiaries, issuance of convertible bonds, disinvestments, etc.), and

- generic provisions already accumulated to cover future losses.

Indeed, these various measures substantially increase the Core Tier 1 ratios of each of the banks, so that all of the banks achieve ratios well above the 5% threshold. For all six banks, taken as a whole, the capital surplus above the 5% threshold more than doubles, reaching €5.05 billion.

More specifically, ATEbank has accumulated significant generic provisions (€ 750 million), which, as noted above, were not incorporated in the results of the exercise reported in column 1. Moreover, the General Assembly of the shareholders approved the issuance of convertible bonds amounting to €235 million. Taking both of the preceding measures into account, its Core Tier 1 ratio stands at 6% at the end of 2012.

For EFG Eurobank, incorporating additional mitigating measures that have either been taken or planned and communicated to the Bank of Greece, leads to a Core Tier 1 ratio of 7.6% by the end of 2012. These measures include the takeover of DIAS Portfolio Investment Company SA, the use of generic provisions already accumulated by the bank, the issuance of convertible bonds, the sale of a majority stake of its subsidiary Eurobank Polbank in Poland, and the placement of a majority stake of its subsidiary Eurobank Tekfen in Turkey.

As shown in column 1, Hellenic Postbank and Piraeus Bank have Core Tier 1 ratios between 5% and 6%, under the adverse scenario. Taking, however, into account measures that have either been implemented or planned, leads to increases of the Core Tier 1 ratios of both banks to levels above 6%. Specifically, in the case of Hellenic Postbank, taking into account generic provisions and the reduction of the trading portfolio already achieved, the Core Tier 1 ratio reaches 7.1% at the end of 2012. In the case of Piraeus Bank, the Core Tier 1 ratio reaches 6.3%, reflecting the issuance of convertible bonds already approved by the General Assembly of the bank’s shareholders and the announcement of the sale of the bank’s subsidiary in Egypt.

General Comments

By construction a stress testing exercise does not aim to provide a baseline forecast of events that are expected to occur. The adverse scenarios assumed in the stress testing exercise are deliberately designed to deal with a 'what-if' hypothetical situation, representing extreme tail risks. Consequently, the results of the adverse scenario do not reflect the current situation or possible immediate capital needs. Nevertheless, the adverse scenarios provide a useful supervisory tool for monitoring of the soundness of the banking system that can be used for timely preventive intervention, should such intervention be judged necessary.

The positive results are due to the fact that Greek banks have during the past two years substantially increased their capital, with the encouragement of the Bank of Greece. Other actions taken included strategic corporate moves, internal financing, the non-payment of dividends and the issuance of preference shares.

The Bank of Greece will continue to closely follow all developments, to ensure that credit institutions maintain the requisite levels of capital and that they take all necessary measures to bolster capital adequacy.

In this context, based on the timetable for the implementation of the 'Memorandum of Economic and Financial Policy' (MEFP), and to facilitate the access of the Greek banks to the international money markets, the Bank of Greece required banks to develop and implement medium-term funding plans, while maintaining a minimum Core Tier 1 capital ratio of 10% from the beginning of 2012. Additionally, the Bank of Greece will proceed with a diagnostic study of the loan portfolios of Greek banks. The study will be completed by the end of 2011 and the results will be considered, inter alia, for the assessment of the additional capital buffers under the Pillar 2.

Furthermore, the Financial Stability Fund, which has been established under the MEFP, provides an additional means of securing the capital adequacy of Greek banks, if needed.

By strengthening the confidence of investors and depositors the above measures at the level of the financial system. together with the measures that will be taken by each credit institution, will ensure the financial stability of the system.

(1) The detailed results for each bank are available on the banks’ websites.