3. Safeguarding financial stability
All necessary policy actions will be taken to safeguard financial stability and strengthen the viability of the banking system. No unilateral fiscal or other policy actions will be taken by the authorities, which would undermine the liquidity, solvency or future viability of the banks.Allmeasures, legislative or otherwise, taken during the programme period that may have an impact on banks' operations (i.e., solvency, liquidity, asset quality etc.) should be taken in close consultation with the EC/ECB/IMF and where relevant the ESM.
The authorities will accelerate actions included in the comprehensive strategy for the financial system related to reinforcing the banking sector by (i) normalising liquidity and payment conditions and strengthening capital (ii) addressing NPLs and (iii) enhancing governance.
Restoring liquidity and capital in the banking system
The authorities are committed to preserving sufficient liquidity in the banking system in compliance with Eurosystem rules and to achieving a sustainable bank funding model for the medium term. In this context, banks are required to submit quarterly funding plans to the Bank of Greece (BoG) so as to ensure continuous monitoring and assessment of their liquidity needs.
The impact of the capital controls will be monitored with full information sharing with the EC, ECB, ESM and IMF. The authorities will manage, in timely consultation with the EC, ECB, ESM and IMF, the process for the easing of capital controls, taking liquidity conditions of the banking system into account while aiming to minimise the macroeconomic impact of the controls {no mention is being done one when the capital controls will be lifted}.
The BoG will require completion of the recapitalisation process for the less systemic banks on the basis of existing capital assessments and if private funds are not available, by [end-July 2016], the BoG will ensure restructuring of these institutions.
Resolution of Non-Performing Loans (NPLs)
As a prior action,
the authorities will:
- adopt amendments to Law 4354/2015 (Law on the Management of Non-Performing Loans, pay-setting arrangements and other emergency provisions in application of the agreement on budgetary targets and structural reforms) in order to allow immediately the sale of performing and non-performing loans with the exception of household loans secured by primary residences belonging to vulnerable groups, for which the liberalization will enter into effect at end-December 2016 {that means that by the end of 2016 even the most vulnerable home owners will be liable to lose their houses};and among others remove restrictions related to the free movement of capital, align taxation with international best practice, remedy inconsistencies related to the securitisation law 3156/2003, and implement all other issues agreed with the Institutions.
- adjust related secondary legislation to the amended Law 4354/2015 and set up the related consultative committee by the Government to fully operationalise the licensing framework of credit servicing firms.
By end April 2016,
a. the Authorities will establish the general principles and devise a roadmap for amending the out-of-court workout law 4307/2014 (OCW) and setting up a coordination mechanism for restructuring public and private debt of viable entities and liquidating non-viable entities;
b. theBoG in cooperation with the SSM will extend the comprehensive monitoring framework with additional key performance indicators (KPIs) in relation to banks' NPE (Non-Performing Exposure) resolution activities. By end June, the BoG, in cooperation with the SSM, will agree with the banks on concrete targets of key financial and operational indicators with the objectives to significantly reduce such exposures and as much as possible reach sustainable restructuring solutions for borrowers. The BoG, in cooperation with the SSM, will ensure that the NPE targets remain ambitious and banks' NPE strategies are adequately designed and executed to reach the targets.The banks will be required to report regularly on these KPIs and their progress in achieving targets for NPE workouts. From October 2016, the BoG will publish quarterly an aggregated summary report on the developments of selected KPIs and targets. The BoG will assign a team for, among others, regular assessment and analyses of banks' performance in achieving targets and its drivers, identification of impediments in case of missing the targets and resons of underperformancewith a view of providing recommendations to the competent authorities and relevant governmental bodies.
By [end-April 2016, as a prior action], the authorities will amend the income tax law to ensure that debt write-offs as result of restructuring agreements are not considered as taxable income of the borrower.
By end May 2016, the HFSF will present an NPL resolution action plan to enhance coordination among banks and accelerate the restructuring of viable, distressed, large corporates, and if needed, jointly tackle entire economic sectors. The HFSF will work actively with the banks so that the recommendations of the report are adopted and used by the banks. The Authorities will utilise the findings of this workstreamin their work on amending the OCW law and establishing the coordination mechanism of private and public creditors.
By end-June 2016,
i. the authorities will
a. amend the out-of-court workout law (OCW) to allow standardized processing of certain categories of borrowers, extend the framework to large borrowers to allow the restructuring of their public and private debt with tailor-made solutions, and provide tax incentives for banks and borrowers to work out debts and develop a coordination mechanisms between private and public creditors to deal with debtors with especially large public and private debts (key deliverable);
b. introduce safe harbor provisions in the laws dealing with debt restructuring (such as the OCW, corporate, and personal insolvency laws) stating that actions taken in good faith by both private and public creditors, and following the procedures established in the law, will not give rise to civil or criminal liability;
c. present a report and detailed proposals of amendments in view to improve the corporate insolvency law, among others, by simplifying and accelerating the procedures, reduce the discharge period and specify the insolvency administrators' functions;
d. appoint new specially trained judges and support staff and set up dedicated chambers for the trial of household insolvency cases to reduce the backlog of pending applications under law 3869/2010.
e. adopt a legislation on the a Debt Information and Support Network located across the country, in order to provide adequate advice to physical persons and SMEs on the legal and financial aspects of debt restructurings. A detailed implementation plan will also be developed by June 2016.
ii. the HFSF will
a. make concrete proposals, in cooperation with the BoG, how to eliminate all remaining non-regulatory impediments to the development of a dynamic NPL market based on the study delivered in October 2015, which will be published by the HFSF. The Authorities will remove the remaining impediments by end-2016.
iii. the Bank of Greece will
a. revise the Code of Conduct for debt restructuring guidelines to deal with groups of borrowers (e.g.: SMEs).
By end-September 2016, the authorities will
a. establish by law publicly accessible information repositories in line with best international practice, including a new real-estate transaction register and a central database to consolidate information on arrears on public liabilities that is accessible to parties with legitimate interest including credit registers to develop credit scores.
b. establish specialized chambers for corporate insolvency matters in the districts of Athens, Thessaloniki and Piraeus.
By end-October 2016,
the authorities will adopt amendments to the corporate insolvency law(key deliverable) in line with the agreed proposals to be submitted by June and enact all necessary secondarylegislations (Presidential Decree, Ministerial Decisions and decisions of the relevant supervisory administrative body) to effectively operationalise the profession of insolvency administrator according to a timeframe agreed with the Institutions by April 2016.
By end-December 2016,
the authorities will assess the effectiveness of the legal and institutional framework for the Household insolvency (law 3869/2010).
Governance of the HFSF
The independence of the HFSF will be fully respected and its governance structure reinforced with a view to preventing any political interference in its management or activities.
In case the Selection Panel (Panel) proposes replacements to the Executive Board and/or General Council, the Minister of Finance will issue decisions in line with the HFSF law. The Panel will carry out a review of the remuneration levels of the governance bodies of the HFSF and propose changes if appropriate, in which case the Minister of Finance will issue the corresponding decision in line with the HFSF law. Should new members be selected by the Panel, they will receive adequate remuneration as proposed by the Panel.
Governance of banks
The Government will not intervene in the management, decision-making and commercial operations of banks, which will continue to operate strictly in accordance with market principles. Any potential replacement of board members and senior management of the banks will be carried out without any interference by the Government. These appointments will be made in line with best international practices, taking into account the specific rules of the HFSF law as regards the rights of private shareholders who participated in the banks’ capital increases under the existing framework.
By end-May 2016 (key deliverable), the HFSF with the help of an independent international consultant will finalise the review of the boards of the banks in which the RFAs apply. This review will be in line with prudent international practices by applying criteria that go beyond supervisory fit and proper requirements. By end-July 2016, bank board members should be replaced in a manner that reflects the findings of the above review and respect the HFSF law. The HFSF will make sure that the recruitment of any new board members and any senior executives will be fair and transparent, and that these new members and senior executives are not representatives of past shareholders or linked to borrowers of the bank with an exposure of [EUR 1million] or any exposures in arrears. The HFSF will ensure that the new members shortlisted and nominated by the Nomination Committees of the banks respect the criteria specified in the HFSF law and further established by the review. By the same date, organisational and governance changes recommended by the review will also be implemented in the banks.
By end-September 2016, the BoG will assess if banks boards’ and management have been aligned with the recommendations of the review and, if needed, the Authorities will take further action, including amendments to the regulatory bank governance framework.
The HFSF will ensure through the amended Relationship Framework Agreements (RFAs) that the external auditors' contracts with the banks can be for a maximum duration of five consecutive years, and the first rotation of the current auditors will take place in all banks as soon as possible operationally but not later than for the financial year of 2018.
All necessary policy actions will be taken to safeguard financial stability and strengthen the viability of the banking system. No unilateral fiscal or other policy actions will be taken by the authorities, which would undermine the liquidity, solvency or future viability of the banks. All measures, legislative or otherwise, taken during the programme period, which may have an impact on banks' operations, solvency, liquidity, asset quality etc. should be taken in close consultation with the EC/ECB/IMF and where relevant the ESM .
By end-August 2015, the authorities will finalise a comprehensive strategy for the financial system which has deteriorated markedly since end-2014. The main focus of the strategy will be on restoring financial stability and improving bank viability by: (i) normalising liquidity and payment conditions and strengthening bank capital; (ii) enhancing governance; and (iii) 18 addressing NPLs. This strategy, which will build on the strategy document from 2013, while taking into account the changed context and conditions of the financial system, will include plans regarding the foreign subsidiaries of the Greek banks according to their restructuring plans approved by the European Commission, and will aim to attract international strategic investment to the banks and return them to private ownership in the medium term.
Restoring liquidity and capital in the banking system
The authorities are committed to preserving sufficient liquidity in the banking system in compliance with Eurosystem rules and to achieving a sustainable bank funding model for the medium term. In this context, banks will be required to submit quarterly funding plans to the Bank of Greece (BoG) so as to ensure continuous monitoring and assessment of liquidity needs. The authorities will monitor and manage the process for the easing of capital controls taking liquidity conditions in the banking system into account while aiming to minimise the macroeconomic impact of the controls.
A buffer of up to €25bn is envisaged under the Programme to address potential bank recapitalisation needs of viable banks and resolution costs of non-viable banks, in full compliance with EU competition and state aid rules. Following a forward-looking assessment of the four core banks’ capital needs by the ECB and the submission of capital plans by the banks, any remaining identified capital shortfalls will be addressed fully by end-2015 at the latest. The Bank of Greece will assess the capital needs of other banks where it was not recently done. The recapitalisation framework will be developed with a view to preserving private management of recapitalised banks and to facilitating private strategic investments. The law relating to government guarantees on deferred tax assets (DTAs) will be amended to minimise programme funding and limit the link between the banks and the state.
Resolution of Non-Performing Loans (NPLs)
While short-term actions to address the problem of high and rising NPL ratios will be specified below in this document, additional measures and actions may be needed in the future so as to resolve the NPLs of the banking sector. By end August 2015, the Bank of Greece will issue all necessary provisions to implement the Code of Conduct, after improvements in agreement with the institutions.
As a prior action, the authorities will: a) develop a credible strategy for addressing the issue of non-performing loans that aims to minimize implementation time and the use of capital resources, and draws on the expertise of external consultant(s) for both strategy development and implementation; b) adopt the following short-term reforms: (i) amendments to the corporate insolvency law to cover all commercial debtors, bring the law in line with international best practice including changes to promote effective rehabilitation of viable debtors and a more efficient liquidation process for non-viable debtors and reducing the discharge period to 3 years for entrepreneurs in line with the 2014 EC Recommendation; (ii) amendments to the household insolvency law to introduce a time-bound stay on enforcement in line with cross country experience; establish a stricter screening process to deter strategic defaulters from filing under the law, include public creditor claims in the scope of the law providing eligible debtors with a fresh start, tighten the eligibility criteria for protection of the primary residence, and introduce measures to address the large backlog of cases (e.g. increasing the number of judges and judicial staff, prioritization of high value 19 cases, and short-form procedures for debtors with no assets and no income), (iii) adopt legislation to establish a regulated profession of insolvency administrators, not restricted to any specific profession and in line with good cross-country experience; (iv) adopt provisions to re-activate of the Government Council of Private Debt, establishing of a Special Secretariat to support it.
By end-October 2015, (key deliverable), drawing on the expertise of an external consultant, the Bank of Greece will deliver a report on the segmentation of NPLs on banks’ balance sheets and an assessment of banks' capacity to deal with each NPL segment. The Hellenic Financial Stability Fund (HFSF) in cooperation with the Bank of Greece will provide an analysis to identify non-regulatory constraints and impediments (e.g. administrative, economic, legal etc.) to the development of a dynamic NPL market. By the same date, a working group, drawing on independent expertise and cross-country experience, will examine and recommend specific actions to accelerate NPL resolution, including by removing any unnecessary legal or other impediments to NPL servicing and disposal while protecting vulnerable households consistent with the Code of Conduct established by the Bank of Greece. The authorities will establish by law a Debt Information network and Debt Information Centre, providing legal and economic debt advising.
By end-November 2015 (key deliverable), the Government will strengthen the institutional framework to facilitate NPL resolution, including (i) improving the judicial framework for corporate and household insolvency matters by adopting appropriate legal instruments to establish specialized chambers both for household and corporate insolvency cases and appointing and training an adequate number of additional judges (based on targeted caseload) and judicial staff for both corporate and household insolvency cases; (ii) establishing of a Credit and Wealth Bureau as an Independent Authority that will identify lenders payment capabilities for the facilitation of banking institutions, (iii) amending the outof-court workout law so as to encourage debtors to participate while ensuring fairness among private and public creditors; (iv) fully operationalising the specialist chambers for corporate insolvency within courts. The Government will establish a permanent social safety net, including support measures for the most vulnerable debtors and differentiating between strategic defaulters and good-faith debtors. The HFSF in consultation with BoG will identify mechanisms and processes to accelerate NPL resolution. The HFSF will nominate an executive board member and an internal team dedicated to the new objective of facilitating banks' NPL resolution. The Bank of Greece will engage a single special liquidator to ensure individual liquidators are delivering effectively against operational targets. Performance based remuneration scheme will be introduced for all special liquidators in consultation with the HFSF in order to maximise recovery.
By December 2015 (key deliverable) the authorities will (i) introduce coordination mechanisms to deal with debtors with large public and private debts firstly by segmenting commercial debtors with large public debts according to viability status and secondly by adopting legislation to facilitate fast-track liquidation of unviable entities by end-March 2016 and completion of the clean-up process by end-December 2016; (ii) adopt the necessary legal instruments setting out the applicable framework and rules for the insolvency administrator profession (including the manner of professional organization, qualification requirements, procedures enabling effective accreditation, powers and responsibilities, manner of appointment and dismissal, supervision and monitoring, sanction and liability provisions, and the fee structure) .
By end-February 2016 (key deliverable), upon receiving banks' proposals, the Bank of Greece will agree with banks on operational targets for NPL resolution including for example loan restructuring, and the creation of joint ventures. Banks will report quarterly from June 2016 to the BoG against key performance indicators (KPIs). The HFSF will also apply NPL resolution performance criteria to banks' management against operational targets agreed between banks and the Bank of Greece. The HFSF will present and implement an NPL resolution action plan to enhance coordination among banks and accelerate the restructurings of the large corporates, and if needed jointly tackle entire economic sectors.
By end-March 2016, the Bank of Greece will revise the Code of Conduct for debt restructuring guidelines to deal with groups of borrowers (e.g.: SMEs) on the basis of clear criteria to segment retail portfolios and introduce in coordination with the HFSF fast-track mechanisms including standardized assessment templates, restructuring contracts, and workout solutions.
By end-June 2016, the authorities commit to assess the effectiveness of the insolvency legal and institutional framework and introduce any necessary amendments.
Governance of the HFSF
The independence of the HFSF will be fully respected and its governance structure reinforced, with a view to preventing any political interference in its management or activities.
By mid-October 2015 (key deliverable), the HFSF law will be amended so as to (i) bring the law in line with the BRRD transposition and the new recapitalization framework to be developed (ii) to reinforce the HFSF's governance arrangements in line with the Euro Summit statement especially by changing the selection and appointment process and in particular, (a) a new procedure for the selection and appointment of members in the Executive Board and General Council will be designed by end September 2015 which will imply a greater role for the Institutions than in the past; (b) a Selection Panel will be set up, composed of six independent expert members, of which three appointed by the EU institutions - including the chairman with a casting vote in the event of a tie - , and three appointed by the authorities (two by the Ministry of Finance and one by the Bank of Greece). The Ministry of Finance, the Bank of Greece, the European Commission, the ECB and the ESM will each have an observer to the Selection Panel. The Selection Panel will be assisted by an international recruitment consultant selected by the Panel; (c) the Minister of Finance will nominate from the candidates shortlisted by the Panel; (d) the Panel will also define the remunerations and other conditions of employment including evaluation and dismissal process. The Law will also ensure that (i) that remuneration and other conditions of employment are competitive so to attract high-quality international candidates for HFSF management positions; (ii) to include powers, criteria and procedures for the HFSF to review and change - if needed – the boards and committees of banks under its control; (iii) to increase transparency and accountability of the HFSF through annual publication of strategies and semi-annual reporting of performance against key objectives; and (iv) include, among the HFSF objectives, the facilitation of banks' NPL management.
By end-March 2016, to increase HFSF transparency and accountability, the HFSF will publish an operational strategy annually and, starting from June 2016, report on performance against this strategy semi-annually.
Governance of banks
The Government will not intervene in the management, decision-making and commercial operations of banks, which will continue to operate strictly in accordance with market principles. The board members and senior management of the banks will be appointed without any interference by the Government. These appointments will be made in line with EU legislation and best international practices, taking into account the specific rules in the HFSF law as regards the rights of the private shareholders who participated in the banks’ capital increases under the existing framework. The HFSF ensures through the amended Relationship Framework Agreements (RFAs) hat as of the financial year of 2016 the external auditors' contracts with the banks can be to a maximum of five consecutive years.
By end-February 2016 (key deliverable), the HFSF with the help of independent international consultant will introduce a program to review the boards of the banks in which the RFAs apply. This review will be in line with prudent international practices by applying criteria that go beyond supervisory fit and proper requirements. By end-June 2016, following the review by the HFSF of the board members along the process described above, members may be replaced in a manner that ensures banks' boards include at least three independent international experts with adequate knowledge and long-term experience in relevant banking and with no affiliation over the previous ten years with Greek financial institutions. These experts will also chair all board committees.
By October 2015, the need for any measures, in addition to those indicated above, will be explored to ensure that bank governance is sufficiently strengthened to be fully independent and in line with international best practice.