By George Georgiopoulos
ATHENS (Reuters) - Greece is readying legislation to set up a 10 billion euro (8.2 billion pound) support mechanism for banks to turn to if their capital adequacy falls and they are unable to raise funds from markets to beef up their equity.
Rising bad loans, downgrades to sovereign debt holdings and a deepening recession are seen taking a toll on Greek bank earnings this year and authorities want to have a safety net ready to provide capital should there be significant erosion in banks' equity.
The so-called Financial Stability Fund (FSF), part of the 110 billion euro emergency loan package debt-laden Greece secured from the IMF and its euro zone partners to avoid default, will be gradually funded with 10 billion euros.
Debate on the FSF began on Thursday with the parliament's monetary affairs committee grilling the deputy finance minister on the fund's structure. The government aims to have a draft bill by the end of June.
"The purpose is not to provide liquidity support," Deputy Finance Minister Philippos Sachinidis told deputies. "The aim of this initiative is to deal with a collateral problem ... the banking system is facing the backwash of the fiscal crisis."
Greek banks have underperformed European peers since the start of the year, shedding 44 percent. The country's debt crisis, which sparked contagion fears and roiled the euro, has hurt them through higher funding costs, a squeeze on margins and trading losses tied to government bond holdings.
Banks will be required to turn to the fund if their capital adequacy ratios fall below minimum thresholds set by the central bank and they cannot raise funds in the private sector to boost their capital base.
CAPITAL CUSHION
Capital injections from FSF will take place via the purchase of preferred shares banks will issue. The idea is that a stronger equity will facilitate lenders to re-access capital markets and limit recourse to eurosystem facilities.
Banks will have up to five years to pay back the capital and buy back their preferred shares at the issue price. Beyond this time limit, they will face a penalty surcharge on the buyback.
Under the plan, if banks still cannot repurchase the preferred shares after five years, and are unable to meet capital adequacy requirements, the shares will be converted into ordinary shares and FSF can require a restructuring to make the bank viable.
In line with what has been agreed with the IMF and the euro zone, the FSF will have a seven-year duration and its board will be appointed by the head of the Bank of Greece, the finance ministry. European Commission and the European Central Bank appointees can take part in board meetings as observers.
The fund will report semi-annually to the ECB, the European executive and Greece's parliament.
"The message we want to send to those who doubt the capacity of the banking system to withstand the crisis is that there is a fund set aside with 10 billion euros to cushion even extreme scenarios as regards loan impairments," the minister said.
Sachinidis said FSF's cash armoury will be sufficient to accommodate any losses under stress-test scenarios. "There was an analysis and based on hypotheses on potential losses, it was ascertained that the amount of 10 billion euros is sufficient," he told deputies.
(Editing by Toby Chopra)
