ay iCombining Management and Finance tools for the measurement of Commercial Banking performance: The case of Greek systematic banks
Table of Contents:
1) Introduction:………………………………………………………………………………1
2) The banking system until the economic crisis:…………………………………………..5
2.1) The major changes that took place in the Greek banking system during the 90s……… 5
1) Introduction:
Greece is going through right now a very deep economic crisis that has adverse micro – macro and social effects. The crisis began when the government revised its budget deficit in 2008. The global economic community was alarmed by the magnitude of the deficit and bond prices started rapidly declining since investors believed that the Greek economy with the huge deficits and the lack of competitiveness was not viable any longer and the possibility of a default should be taken seriously into consideration (Stathakis, 2010).
In order to deal with the huge deficits Greece was imposed a memorandum that was accompanied with severe austerity measures. The latter further aggravated the crisis since consumer spending substantially decreased due to the decrease of disposable income and investments came to a halt. The crisis culminated in 2012 with the speculation that Greece was on the verge of quitting the European monetary union and adopting its own currency (Matsaganis, 2013).
The Greek government implemented structural and fiscal reforms to comply with the memorandum reforms and to be eligible for a monetary aid. As far as the government balance is concerned there has been a considerable improvement owing to the hard austerity measures taken. The budget balance shifted from a deficit of 9.9% in 2009 to a surplus of 1.5 % in 2014 in terms of GDP www.fas.org/sgp/crs/row/R44155.pdf
The government proceeded also into structural reforms but the latter were not effective. Corruption and low productivity still affects the public sector while the private sector is still overshadowed by the former. The need for the shrinkage of the public sector was not satisfied
After 2012 the economy showed signs of recovery but in 2015 with the election of the new government and its intentions to adopt a policy that was considered to be detrimental to the interest the European authorities the crisis intensified and the bond spreads reached record levels indicating that the probability of quitting the Euro zone was bigger than ever.
The reasons for this situation are plentiful and we shall make a reference to a few of them. Greece had adopted throughout the years an economic model that relied on foreign borrowing and on the high involvement of the state in the economic activity. The economic model employed turned out to be entirely ineffective since it resulted in huge deficits in the balance of payments and in the development of a nonproductive public sector. (Chardouvelis,2011).
The main weaknesses of the Greek economy are lack of competitiveness, corruption, excess state involvement of the government in the economy, lack of industrial goods, lack of the proper production and institutional infrastructure, poor exports , strong dependence on imports, high inflation etc.
The big problem of the Greek economy after the adoption of the common currency was that it deprived of a crucial monetary tool such as exchange rate policy. Greece could no longer devalue its currency to enhance exports and deal with the trade deficit. Moreover during that period easy access to credit resulted in excess borrowing from the government and householders. Finally wages did not reflect the level of productivity and were considered to be overvalued. (Chardouvelis,2011).
The Greek crisis halted economic activity and resulted in the contraction of GDP by more than 20% after 2008. It was an unprecedented crisis not only for its intensity but for its duration as well. In the following diagrams we demonstrate the impact of the crisis on several crucial macroeconomic variables.
Source: World Bank 2015
Source: World Bank 2015
Source: World Bank 2015
Source: World Bank 2015
Source: World Bank 2015
The above figures show that the crisis impact on macroeconomic figures was very strong. GDP exhibited negative growth rates, the level of wages dropped, while deflation started taking effect due to very weak demand. The government debt GDP ratio deteriorated since austerity measures intensified the crisis.
The economic crisis in Greece has also adverse effects on a micro level. Most of the companies belonging to any sector exhibited a remarkable decline in their profitability. From 2007 the companies that are listed have experienced a decline in their profitability by an amount of more than 5.5 billion. If we take into account the losses of the Greek banks that are attributable to the PSI effect total losses of listed companies exceed the amount of 65 billion euro. (www.kathimeni.gr).
The Greek banking sector while not having been significantly affected by the global crisis of 2008 it was severely affected by the Greek crisis and the crisis in the Eurozone. The constant downgrades of Greece’s sovereign debt resulted in the decline of ratings of the Greek banks which in turn resulted in the deterioration of their liquidity (www.gr2014.eu).
The ability of Greek banks to raise liquidity through the international interbank market was significantly restricted and the specific credit institutions were obliged to rely on the Euro system credit facilities. Greek banks also relied on the Emergency Liquidity Assistance mechanism.
The involvement of the private sector in Greece’s debt exchange offer was very significant. Approximately 199 billion have been exchanged with a discount of 53.5 % resulting in a loss from PSI that exceeded 37.7 billion. Moreover the debt back loss for the Greek credit institutions and which was realized after the government proceeded in the buyback of bonds reached the amount of 5 billion.
In the present assignment we are going to examine the impact of the crisis on bank performance. We are first going to refer to the situation of the banking system before the crisis and we shall assess the impact of the crisis in the bank’s performance. The impact assessment will be done through ratio analysis. The specific analysis relies on financial statements and has the benefit that the relevant indices provide a lot of information regarding the financials situation of any company including banks of course. The indices employed will be the efficiency ratio, the capital adequacy ratio, the liquidity ratio and the investment ratio. We shall see that these ratios were adversely affected by the huge economic crisis.
In another chapter we shall observe how macroeconomic and other banking factors affected the performance of banks. To fulfil this purpose we shall run a pooled regression analysis from 2004 until 2014 for 4 banks.
2) The banking system until the economic crisis:
2.1) The major changes that took place in the Greek banking system during the 90s:
Till the beginning of 90s the banking system was strictly regulated, the government’s involvement in the sector was very high and Greek banks were characterized by high inefficiency. The Greek economy in that period was characterized by high inflation and interest rates, increased government spending and huge deficits. The necessity to meet the Maastricht criteria caused a number of reforms in the Greek economy and the banking sector inevitably followed the economic development.
During the 90s therefore the deregulation of the Greek banking started taking place. The banks had now greater flexibility regarding the management of their assets and liabilities and this development resulted in the prevalence of competitive conditions in the sector. The credit institutions were competing with each other in terms of deposits levels, loan granting, interest rates and a variety of services offered.
At that period the banks represented the major financing mechanism of the Greek economy. Through a series of mergers and acquisitions their size increased and economies of scale were accomplished. Moreover it was a period where the banks started internationalizing their activities by expanding into foreign markets. (Gortsos, 2001)
The major mergers and acquisitions that took place during that period was the acquisition of Ioniki Bank from Alpha Bank in 1999 the acquisition of Central bank from Egnatia Bank in 1998, and the acquisition of Interbank, bank of Athens, Creta Bank, Ergasias Bank from Eurobank.
Bibliography
Gortsos X., Kefalas, X. Sachinidis, F. (2001). The impact of the common currency adoption on Greek banks. Hellenic banking institute.
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