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Greek banks will have to isolate their troubled assets from the rest to help build the trust of investors and depositors, put an end to doubts and make a fresh start. The top executives of two large banks said last week they intend to do this in the next few months, while a national asset management company may assume the troubled assets of existing bad banks. These are steps in the right direction for banks to provide credit to the economy and avoid a short-lived creditless recovery. In both cases, the management pricing and servicing of troubled loans will be important.
We stressed last week the need for local banks to get rid of their portfolios of troubled loans so as to make a fresh start and provide credit to creditworthy households and private companies in the future. The “bad bank” model, first introduced in the 1980s, provides a structural solution to the problem in a country where direct sales of bank loan portfolios to distressed funds are viewed negatively by the public and the political elite whose ability to mess things up should not be underestimated.
Although direct sales of loans to funds specializing in distressed investments could take place, it would likely be tiny compared to the stock of nonperforming loans (NPLs), which exceeds 65 billion euros at present. By creating a bad bank either as an external institution that is legally and operationally separate from the original bank or an internal entity responsible for winding down ring-fenced portfolios of troubled assets, Greek banks can do more to regain the trust of investors and depositors.
Two top bankers at Piraeus and National told Reuters on Thursday their banks intend to segregate weak assets from the rest. So, it looks as if Greece will proceed with a two-tier scheme. First, there will likely be a “national” bad bank, which will assume the troubled assets of all existing bad banks, such as the bad ATEbank, the bad Hellenic Postbank bank and smaller ones. Second, all or some of the four systemic banks will likely set up their own bad banks and try to convince investors, including foreign distressed funds, to become shareholders in the bad banks joining future share capital increases reports Kathimerini.
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