UPDATE 1-Greek banks face extra monitoring in return for aid

Fri Nov 16, 2012 11:51am EST

By George Georgiopoulos

ATHENS Nov 16 (Reuters) - Greece's international lenders will enforce additional supervision on the country's troubled banks along with the billions of euros they will provide to shore them up, senior bankers said on Friday.

The so-called troika of the European Commission, European Central Bank and International Monetary Fund lenders wants its own monitors at each bank receiving state support to oversee credit policies and restructuring plans.

"The supervision by monitoring trustees has been demanded by the troika and the EU Competition Commission," one of the bankers with direct knowledge of the matter told Reuters, declining to be named.

"The trustees will not only be looking at new credit, they will also have a say on how lenders are managing their entire loan book and their follow-up on existing loans."

They will also oversee any lending to top management, board members and staff, and their families, the banker said.

Of Greece's second 130 billion euro ($166 billion) bailout package, 50 billion euros is earmarked to recapitalise the country's battered banking sector, and international lenders want better supervision to ensure banks follow best practice.

In 2012 Reuters has published several in-depth reports on alleged mismanagement at Greek and Cypriot banks, including Proton Bank, Piraeus Bank and Marfin Popular Bank, now renamed Cyprus Popular Bank.

In May, Piraeus announced it was suing Reuters over a report about the bank renting properties owned by companies run by its chairman and his family. The bank is claiming 50 million euros in damages. Reuters stands by the accuracy of its report.

RECAP TERMS

On Monday, Athens unveiled a long-awaited framework to recapitalise its banks, whose equity base was nearly wiped out by huge losses from a sovereign debt swap and rising loan writedowns in a deep recession.

Under the plan, banks will have to issue new shares to achieve at least a 6 percent core Tier 1 capital adequacy ratio plus bonds that can be converted into shares - so-called CoCos - to boost it up to 9 percent.

The private sector will have to take up at least 10 percent of the new shares to be issued to keep lenders privately run. Failure will mean nationalisation.

The remainder will be taken up by a bank support fund, the Hellenic Financial Stability Fund (HFSF), which is funded from the country's bailout and has already injected 18.5 billion euros into the country's four biggest banks.

The HFSF, which will provide most of the new capital by buying most of the new shares and all of the convertible bonds, will become the banks' biggest shareholder.

Greek bank shares fell sharply when the recapitalisation framework was unveiled on Monday.

Concerns over the dilutive impact of the scheme on current shareholders and an annual 7 percent coupon that banks will have to pay annually on the CoCos pulled the banking index down 15 percent.

"Adding an extra layer of supervision will mean less flexibility for bank managements," said Euroxx Securities analyst Maria Kanellopoulou.

"The troika does not want banks to be nationalised. But given the large amounts that will be pumped into them, it wants to have a say."

Bankers expressed reservations on the troika's demand for tighter scrutiny, saying it might prove cumbersome for commercial banking operations.

"This demand by the troika shows lack of trust. It will place too much responsibility in the hands of monitoring trustees who are not commercial bankers," said a senior banker who declined to be named.

"Overseeing restructuring plans is logical, but when it comes to credit policy it may make things a bit dysfunctional, inefficient," the banker said. "But the troika thinks this is necessary, and that's that."

The independent monitors will be picked from credible auditing firms and will have to be approved by the European Commission. They will report to the troika and have full access to banks' books, the bankers said.

According to Kathimerini newspaper, the tighter supervision also aims to cut the umbilical cord between banks and the political system and big media organisations, some of which have received loans that might not have been granted under strict banking criteria.

The paper said all loans would come under the microscope - credit extended to banks' staff, shareholders and top management, including their spouses, children and relatives.

In Greece's state-financed political system, big political parties pledged future state funding as collateral to get bank loans. The parties, with debt of more than 200 million euros, now face much lower income to service their loans, as falling popular support in recent elections means they will get less from the state, which bases its funding on the proportion of votes won.