IFLRinternational financial law review

BANK CAPITAL REPORT 2015: GREECE

1. Bank Supervision

The CRR is directly applicable in Greece from January 1 2014, with theexception of certain provisions which will enter into effect at a later stage.Transitional provisions on the calculation of own funds were put in placeby the Bank of Greece (BoG), the local bank regulator, in decision No114/1/4.8.2014 (Credit and Insurance Committee Decision, CICD).

CRD IV was transposed by law 4261/2014 (the CRD law) and is gen-erally applicable from January 1 2014. Certain provisions will enter intoforce from January 1 2016. Secondary legislation issued under the previouslegal framework will remain in force, to the extent not contrary to the GreekCRD law and the CRR, until replaced by new secondary legislation. TheCRD law abolished and replaced law 3601/2007 which, in turn, transposedinto Greek law directives 2006/48 and 2006/49.

The Bank of Greece is in charge of supervising credit institutions. As ofNovember 4 2014, the European Central Bank (ECB) took over direct su-pervision over systemic Greek credit institutions in line with the Single Su-pervisory Mechanism (SSM). The four Greek systemic banks which fall intothe supervising powers of the ECB are Alpha Bank, Eurobank Ergasias, Na-tional Bank of Greece and Piraeus Bank.

Smaller Greek banks, such as Attica Bank or certain cooperative banks,remain within the supervisory perimeter of the Bank of Greece.

Investment firms are supervised by the capital markets regulator, the Hel-lenic Capital Markets Commission (HCMC). For the purposes of this pub-lication we discuss credit institutions only and the BoG’s powers.

No major changes are anticipated in the next 12 months as to the allo-cation of supervisory powers among regulators, other than those relevant tothe implementation of the Single Resolution Mechanism (SRM) frameworkwhich is still work in progress in Greece.

2. Bank recovery/ bail-in

The deadline for implementation of the BRRD into Greek law was Decem-ber 31 2014. However, it has not been transposed as such into Greek lawto date. The same applies to the implementation of the SRM framework.

Although the BoG has not issued draft regulations or a timeline to im-plement the BRRD, the bank resolution and recovery framework in Greeceis relatively mature and similar to the BRRD in terms of resolution tools.The Greek resolution tools were introduced in 2012 in the context of theGreek financial crisis and were applied in the overall scheme for the consol-idation of the Greek banking market.

By way of general rule, Greek credit institutions must draw up and main-tain a recovery plan including steps to address any capital shortfall. The de-tails of such plans are provided in the Act of the BoG’s Governor No.2648/2012. The BoG may implement preventative and resolution measuresto credit institutions under the CRD law which retained all relevant provi-sions provided by the previous legal framework.

While at preventative stage, the BoG may request a credit institution toproceed with a share capital increase within specific timeframes. It may alsoappoint a commissioner to manage the credit institution or grant a manda-

tory suspension (by extending the relevant deadlines) of certain contractualobligations of the credit institution.

The BoG can, through its Resolution Measures Committee, order reso-lution measures to safeguard financial and/or systemic stability and depos-itors trust in the credit institution and overall banking system. Theresolution tools provided under the CRD law are: mandatory share capitalincrease, transfer of business and establishment of a bridge bank.

A bail-in tool is also available under Greek law but in a different context.In 2010, as part of Greece’s fiscal adjustment programme under the EU,IMF and ECB, the Greek government established the Hellenic FinancialStability Fund (HFSF), a private law entity mandated exclusively with therecapitalisation of Greek banks. The law establishing the HFSF wasamended in early 2014 to provide for a bail-in process as a prerequisite toinject further HFSF funds into Greek banks. The bail-in perimeter entailscommon shares, preference shares and other tier 1 instruments and subor-dinated instruments. Those instruments may be written down or convertedinto common equity.

The CRD law also provides for a winding-up process applying to creditinstitutions. This is a special insolvency procedure applying to banks insteadof the standard bankruptcy process.

3. Buffers

Buffer requirements are set out in the CRD law (articles 121-134) and areapplicable as from January 1 2016, with the exception of the systemic riskbuffer which the BoG may already implement as from January 1 2015.

Capital conservation buffer: 2.5% Phase-in process: January 1 2016 – 0.625% January 1 2017 – 1.25% January 1 2018 – 1.875% January 1 2019 – 2.5%

Countercyclical buffer: Institution-specific 0-2.5% and, subject to conditions, higher than 2.5%. The CRD law is broadly in line and reflecting CRD provisions. The BoGis the regulator in charge of determining countercyclical buffers on a quar-terly basis, which are published on the BoG website. Phase-in process:January 1 2016 – 0.625% maxJanuary 1 2017 – 1.25% maxJanuary 1 2018 – 1.875% maxJanuary 1 2019 – 2.5%

G-SII buffer: 1-3.5% depending on the G-SII category. There are 5 G-SII categories and the buffer is increased by 0.5% for eachrespective category (applicable upon instructions of the BoG).Phase-in process applicable as a percentage of the buffer: January 1 2016 – 25% January 1 2017 – 50%January 1 2018 – 75%January 1 2019 – 100%

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Greece

Christina Papanikolopoulou and Kely Pesketzi, Kyriakides Georgopoulos

www.kglawfirm.gr

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O-SII buffer: 0-2% (applicable upon instructions of the BoG). There are no announce-ments as to when the BoG will apply the O-SII buffer.

Systemic risk buffer: At least 1% and increasing by 0.5% multiples. BoG to notify and/or consultEBA when determining a systemic risk buffer in excess of 3% and 5%, re-spectively (applicable if BoG opts to issue relevant regulations which it cando as from January 1 2015).

4. Call options

To this date, the BoG has not issued specific guidance as to regulatory and/ortax calls on capital.

5. Coupon payment

Restrictions on distributions under the CRD lawCRD law restrictions as to the distribution of profit and calculation ofMDAs are similar to those in article 141 of the CRD. The concept of a dis-tribution is defined in Greek law similar to the CRD definition. The calcu-lation of MDAs follows the same formula, i.e. the multiple of a base amountwhich includes interim and year-end profits by a factor calculated in accor-dance with the provisions of article 141 of the CRD, reflected in article 131of the CRD law.

The BoG is entitled to order restrictions to the distribution of profits inaccordance with the above whenever the capital requirements ratios andbuffers are not duly met by a credit institution.

In addition to the above, legislation put into effect during the Greek fi-nancial crisis from 2008 onwards introduced restrictions on the distributionof dividends as a consequence of state aid to Greek banks.

State-aid was provided to Greek banks by means of two legislative tools:the Hellenic Bank Support Plan established by law 3723/2008 and the re-capitalisation of Greek banks by the HFSF pursuant to law 3864/2010.

The Hellenic Bank Support PlanThe Hellenic Bank Support Plan was enacted to provide state originated fi-nancial assistance to Greek banks by means of three pillars:

• Pillar I: special preference shares that qualify as tier 1 capital

• Pillar II: state guarantees to debt instruments issued by the bank

• Pillar III: special debt instruments issued by the Greek state

The support plan was put in place as a provisional measure with limitedduration. However, its timeframes were extended several times to allow forthe Greek banks’ participation in the programme until June 30 2015 (withrespect to pillars II and III).

During the period of a bank’s participation in the plan, dividend payoutsare limited to up to 35% of distributable profits at the parent company level.Dividend distribution for the financial years ending 2010, 2011, 2012 and2013 was further restricted to share distributions, excluding repurchase ofshares.

Furthermore, while participating in the plan credit institutions cannotbuy back their shares to enhance liquidity. This prohibition does not applyto the repurchase of preference equity shares issued as redeemable if the buy-back is intended to strengthen core tier 1 capital.

HFSF Recapitalisation In the context of its participation in the share capital of Greek systemicbanks, the HFSF entered into relationship framework agreements withbanks and appointed representatives in their corporate bodies. HFSF rep-resentatives have veto rights with respect to core business decisions, includ-ing dividend distributions.

Furthermore, HFSF capital injections in the form of state originatedfunds qualifying as state-aid were made on the basis of restructuring plansapproved by the EU’s competition directorate. In certain cases such plansincluded restrictions on profit distribution.

In addition, banks may not buy-back own shares without the HFSF’sprior approval as long as the HFSF participates in their share capital.

Consequently, because of the special legislative framework that governsGreek banks as a result of the financial crisis, a series of additional restric-tions apply to the distribution of profit and hence payment of certaincoupons.

6. Credit default swap contracts

Greece has not issued additional rules with regards to the use of credit de-fault swaps or other tools to mitigate credit risk in addition to those in theCRR.

7. Disclosure & reporting

CRR/CRD disclosure rules apply. In parallel, secondary legislation issuedby the BoG prior to the transposition of the CRD IV into Greek law applies,but is in transitional phase.

8. Leverage ratio and liquidity coverage ratio

LiquidityArticle 412 CRR allows EU member states to regulate liquidity require-ments until an EU-wide framework is put in place. The BoG has not issuedrelevant secondary legislation for that interim period.

Under the previous legal framework the BoG issued rules on liquidityratio requirements, relevant reporting obligations and methods of calcula-tion (Act 2614/7.4.2009). To the extent not contrary to the CRR and CRDlaw those rules still apply and provide for two basic liquidity ratios: a liq-uidity asset ratio of 20% and a maturity mismatch ratio of -20%.

LeverageCRR provisions and transitional rules with respect to leverage ratio require-ments, calculations and reporting apply directly to Greek credit institutions.The BoG has not issued guidance as to the transitional phase-in of leveragerelated requirements, or the option to calculate end-of-quarter leverage ratiosduring transitional periods.

9. Loss absorption features

CRR provisions apply directly to Greek credit institutions.

Secondary legislation issued under the previous regulatory frameworkand now abolished by transitional secondary legislation required AT1 in-struments to have loss absorption features. Those features needed to allowlosses incurred during regular business to be absorbed by the original capitalor principal and dividends or coupon payments respectively.

This should not inhibit the credit institution from raising additionalfunds through schemes approved by the BoG. Write-off and conversion intocommon equity were explicitly stated to be considered as appropriate lossabsorption features.

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10. Minimal capital

CRR provisions on minimum CET1, tier 1 and total capital ratios, includingthe relevant phase-in frameworks, apply directly to Greek credit institutions.

Transitional requirements applied for the period January 1 2014 to De-cember 31 2014: CET1 ratio 4.5%, tier 1 ratio 6%, total capital ratio: 8%.

During 2013, when the HFSF undertook the recapitalisation of Greeksystemic banks, the BoG issued special capital requirements applicable asfrom March 31 2013: a 9% core tier 1 ratio and a 6% ratio, which takesinto account certain core tier 1 elements (in particular the extent to whichtotal preferred shares and contingent convertible securities, if any, exceedcore tier 1 elements), and a total capital ratio of 8%.

11. Pillar 2

No secondary or other legislation has been issued to date pursuant to theCRD IV package. Under the Basel II framework, the BoG’s Governor hadissued Act 2595/20.8.2007 providing for guidelines as to internal capitaladequacy assessment processes (ICAAP) that should be complied with Greekcredit institutions.

12. Qualifying capital

By way of general rule, the new CRR provisions on qualifying capital applydirectly to Greek banks.

The BoG issued transitional provisions (CICD 114/2014), includinggrandfathering of certain instruments, in accordance with articles 467, 468,478, 479, 480, 481 and 486 of the CRR. Those provisions include, amongothers, progressive deduction percentages for certain items of regulatory cap-ital, the recognition of certain instruments, and additional filters.

By way of general rule, the grandfathering period for the de-recognitionof instruments that no longer qualify as own funds is 8 years, starting in2014. As of January 1 2014 80% remain recognised. This decreases by 10%each year until 2021. As of 2022 instruments that no longer qualify as ownfunds will be fully de-recognised.

In terms of government debt held by Greek banks, the BoG has not is-sued guidance as to the inclusion or not of unrealised losses or gains on ex-posures to central governments classified in the available for sale portfolioin accordance with IAS 39. Consequently, the general transitional frame-work would apply for instruments measured at fair value (100% deductionof unrealised losses for January 1 2014 to December 31 2017, 100% recog-nition of unrealised gains from shares, debt instruments and loans classifiedin the available for sale portfolio).

However, it should be noted that Greek government debt held by privateinvestors, including the Greek banks, underwent a major restructuring in2012 (the Private Sector Involvement, PSI). Special legislation was enactedto govern the accounting and tax treatment of PSI related losses.

Decisions made by policymakers envisage maintaining a T-bill stock of€15 billion through the end of Greece’s fiscal adjustment programme sup-ported by the EU, IMF and ECB. Consequently, Greek banks are not al-lowed to subscribe for more than €15 billion of T-bills issued by the Greekgovernment.

With respect to deferred tax assets (DTAs), Greek law introduced a num-ber of measures which apply to Greek credit institutions, allowing the con-version of certain DTAs into directly enforceable credits against the Greekstate (DTCs).

Entering or exiting from such conversion mechanism (the DTC mecha-nism) is optional, subject to shareholder approval and following a recom-mendation by the board of directors.

DTAs can be converted from 2015 onwards, allowing banks to offset theDTCs against their corporate income tax liability, including corporate in-come tax liabilities of group associated entities, as the case may be.

All four systemic banks have made use of the DTC mechanism followingapproval at their respective shareholders’ general meetings held at the endof 2014.

In terms of the grandfathering structure for the de-recognition of DTAs,the grandfathering period for DTAs existing prior to January 1 2014 extendsto 2023 with a 10% progressive de-recognition rate being applicable eachyear.

13. Regulatory intervention

In recent years (2012-2014), because of the Greek financial crisis, the BoGexercised its regulatory intervention powers with respect to a number ofGreek banks and cooperatives.

The BoG used mainly two resolution tools to deal with failing institu-tions, i.e. the bridge bank tool (applied to Hellenic Postbank and ProtonBank) and the transfer of business tool (applied to Agricultural Bank, T-Bank, First Business Bank, Pro-Bank and most of the cooperatives).

Both of these structures involve the transfer of assets and liabilities fromthe credit institution to another bank (whether existing or set up to that ef-fect as bridge entities) and the initiation of a winding-up process for thetransferor bank.

The power to initiate this process lies with the BoG, but the funds re-quired to complete the transfers, in the form of a mandatory sale and pur-chase transaction, come from the DIGF or HFSF. The HFSF (on behalf ofthe Deposits and Investments Guarantee Fund (DIGF), for as long as theDIGF didn’t have, in practice, available funds) covers the funding gap be-tween the transferred assets and liabilities and maintains a preferential rank-ing privilege over the creditors of the transferor credit institution for suchamount.

The HFSF was the sole shareholder of the bridge banks established inthe context of such resolution measures and provided to such banks the cap-ital required to meet the relevant regulatory thresholds.

Implementation of the measures led to a significant consolidation of theGreek banking sector. The four systemic banks (Alpha Bank, Eurobank Er-gasias, National Bank of Greece and Piraeus Bank) acquired assets of failinginstitutions or the shares of bridge banks and used the relevant HFSF fund-ing to enhance their capital position.

To date, the winding-up of the credit institutions placed in liquidationis not yet completed. A series of practical issues were raised during the liq-uidation process, the most material of which being the management of thenon-performing loan portfolios left with the liquidators.

As mentioned above, the BRRD has yet to be transposed into Greek law.Given the extensive application of resolution measures in Greece prior tothe entry into force of the BRRD one may not expect many of the toolsunder the BRRD to be applied in practice in the near future. However, su-pervision and monitoring processes may change in view of the requirementto transpose the SRM framework.

14. Stress tests

In 2014 Greek systemic banks (Alpha Bank, Eurobank Ergasias, NationalBank of Greece and Piraeus Bank) participated in two stress tests: a domesticone by the BoG as an update of a similar exercise in 2012, and theEBA/ECB test and AQR, the results of which were announced in late Oc-tober 2014.

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The BoG domestic stress test completed in March 2014 and thus pre-ceded the EBA/ECB one, triggering capital raising processes for all four par-ticipating banks. They were recapitalised by the end of H1 2014. Both theBoG and the ECB have made test results and methodology available ontheir websites .

15. Tax treatment

Tax on interest paymentsInterest on debt instruments paid by issuers subject to Greek tax (Greek res-idents or foreign entities with a permanent establishment in Greece) is taxedas follows:

• Interest payments to foreign individuals or to foreign legal entities whichdo not maintain a permanent establishment in Greece for tax purposesare subject to Greek withholding tax of 15%, subject to more favourableprovisions of any applicable double tax treaty and EU legislation.

• Interest payments to Greek tax residents are subject to a 15% incometax which exhausts their tax liability for this type of income. For interestpayments made through a Greek paying or other similar agent the taxwill be withheld by the agent. Assuming no Greek paying agent is in-volved the 15% tax is remitted under the annual income tax return filedby the individual.

• Interest payments to legal entities that are Greek tax residents or maintaina permanent establishment in Greece for tax purposes are subject to a15% withholding tax which does not exhaust their tax liability. Such in-come will be treated as part of their annual income and will be taxed atthe prevailing corporate income tax rates (flat 26% if the entity maintainsdouble entry books, or at a tax scale if it has single entry books). The taxwithheld will be offset against the income tax due. If interest paymentsare made through a Greek paying or other similar agent, the tax will bewithheld by the agent in which case the tax liability of the recipient willnot be exhausted for the specific income.

Capital gains taxGains realised from the sale of bonds issued by Greek issuers as well as byissuers which have their seat in a European Union, European EconomicArea, or the European Free Trade Association jurisdiction are exempted fromGreek capital gains tax.

Tax on write down Greece has no provisions for the tax treatment of write down of bank capitalinstruments and there are no precedents from which guidance can be drawn.Furthermore, the tax treatment of the instruments may be affected by theiraccounting treatment under IFRS (debt or equity classification), althoughtax and accounting treatment are not always aligned in Greece.

If the write down is treated by the tax authorities as realised gains , it willbe taxed at the standard income tax rate for banks of 26%. If the debt in-strument is converted into shares for the nominal value of the debt issued,the conversion should be tax neutral. If the instrument is converted intoshares for a lower than the nominal value of the debt instrument, the bankcould be considered as having realised a gain, which would in principle betaxable at the general tax income rate (26%).

According to recent legal literature, income tax should not apply to cor-porates placed in insolvency processes where the supervising authority (iethe court) orders write down of debt. One would envisage a similar approvalfor write downs ordered by the banking regulator.

16. Mutuals and Sifis

To date the BoG has not issued guidelines or other acts qualifying domesticcredit institutions as G-SIIs, O-SIIs, or Sifis.

Mutuals fall in the scope of the CRD law which includes a series of pro-visions to that effect, but no secondary legislation has been issued specificallywith respect to mutuals.

About the authorChristina’s main areas of practice are debt and equity capital markets,bank financing, securitisation and structured finance and regulation offinancial institutions.

Christina has led the KG team on various securities offerings by banksand other companies listed on the Athens Exchange as well as onaccelerated bookbuildings and similar transactions.

She has advised clients on securitisation and covered bond transactionslaunched by Greek originators. She provides advice to financialinstitutions regarding their day-to-day operations and specialisedprojects with emphasis on transactions where international partners areinvolved.

Christina PapanikolopoulouPartner, Kyriakides Georgopoulos

E: ch.papanikolopoulou@kglawfirm.grmain: +30 210 817 1500direct: +30 210 817 1630fax: +30 210 685 6657

About the authorKely’s area of practice is focused on banking and finance. She has beeninvolved in a number of structured and project finance transactions,equity and debt offerings, as well as corporate restructurings. Kelyprovides day to day advice on securities law and banking regulation andhas an academic background on trusts and comparative tax law.

Kely PesketziAssociate, Kyriakides Georgopoulos

E: k.pesketzi@kglawfirm.grmain: +30 210 817 1500direct: +30 210 817 1635fax: +30 210 685 6657