Risks of high rates for banks
BoG warns of threat to households’ debt repayment capacity and of a new wave of bad loans
The increase in interest rates and the deterioration of liquidity conditions for local banks create unfavorable conditions for Greek households and businesses to repay their debts and for accessing new financing, according to the Bank of Greece, which warned lenders to prepare for an eventual rise in bad loans.
In its credit stability report published on Thursday, the central bank warned not only about the prospect of an increase in bad loans, but also indirectly about the possibility of a tightening of financing prospects on the part of the banking system.
Although the amount of possible new bad loans is difficult to estimate, households’ and businesses’ ability to repay debt due to the rise in interest rates and the slowdown in the growth rate of the Greek economy will be adversely affected, warns the central bank, calling on banks to prepare properly to face the new challenges.
“Continuing the financing of the Greek economy presupposes a strong banking sector and the Greek financial system is called upon to immediately adapt to the conditions that are taking shape,” underlines the Bank of Greece, calling for actions to protect it, as “the uncertainty regarding the course of inflation and the effects of the change in monetary policy with the rise of interest rates, the prospects for a lower growth rate of the Greek economy, the risk of a possible sharp revaluation of assets and the intensifying geopolitical and energy crises leave no room for complacency.”
According to the report, there are three main challenges emerging for the banking system. The first concerns the high stock of nonperforming loans, which despite the reduction of the corresponding index to 10.1%, based on first-half data, is still high and far above the European average, which was set at 1.8%. The second concerns banks’ low profitability, due to the withdrawal of the ECB’s measures to provide cheap liquidity to banks, and the increase in their borrowing costs for issuing bonds. Finally, banks’ capital adequacy will be affected by parameters such as future provisions, the cost of capital instruments etc.
