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Bank stress test talk leads to 'moral hazard,' Eurobank chairman warns

Speculation about whether upcoming ECB stress tests will show a need for Greece's banks to raise more capital is unhelpful as it encourages strategic defaults and speculative market behavior, according to the chairman of the country's third-largest bank.

Speaking at the London School of Economics on Oct. 16, Eurobank Ergasias SA Chairman Nikolaos Karamouzis said the IMF's recent suggestion that Greek banks must again undergo a full asset quality review amid fears they might be undercapitalized has caused widespread "moral hazard" in the local financial sector.

"A word about the upcoming stress tests and the recent institutional debate about how they should be conducted: We absolutely believe that we should not turn a hypothetical future recapitalization issue, which has not been documented, into a loose public debate, as the IMF has done recently, publicly requesting another asset quality review and speculating that an additional capital injection is needed," he said.

"Doing so backfires on the banks and the economy, by encouraging strategic defaulters, estimated to be 25% of total NPLs, fueling speculative market behavior — we have seen that in previous weeks, undermining deposit-gathering efforts and increasing 'moral hazard' behavior."

In the past, when Greek banks have found themselves short of capital, some borrowers have stopped paying loans on the expectation that creditors and regulators would require the banks to extend debt relief, Karamouzis said. This "moral hazard" has been observed among both corporate and retail customers, he said.

The ECB is set to begin stress tests on the EU banking sector in February 2018. In September, the IMF — one of Greece's bailout creditors — said a new asset quality review for Greek banks may be on the cards, suggesting it might reveal capital shortfalls. This led to share price falls and deposit withdrawals at Greek banks.

ECB President Mario Draghi later said the results of the stress test, which includes an examination of the lenders' loan quality, could be finalized early. The ECB also said there will be no asset quality review in the immediate future, prompting the IMF to backtrack on its request, saying the stress test would be sufficient, and causing bank stocks to rise.

The IMF said it saw "no financial stability concerns at all" in Greece.

Eurobank's Karamouzis said the ECB's Single Supervisory Mechanism should be trusted with its responsibility within the eurozone to evaluate and determine each bank's financial and capital position.

"The SSM, based on its own assessment, will discuss with each bank's management board separately and privately [about] potential capital needs and will request the submission of a plan of action to rectify a possible capital shortfall based on facts and proper analysis," he said.

He said new regulation due to be adopted in 2018, such as the IFRS9 accounting standard, may have some capital impact on Greek banks, but that it was unlikely that the lenders would have to raise new capital from investors.

Having received an €86 billion bailout from international creditors in 2015, Greece is currently implementing drastic fiscal and legislative reform to restore its economy to growth after a decade of recession. The four biggest Greek banks have separately agreed to cut their nonperforming exposures from €107 billion last September to roughly €67 billion by 2019.

The last ECB "comprehensive assessment" of the banking sector, which comprised a stress test and an asset quality review, was carried out in 2015 and found a capital shortfall of €14.4 billion at the biggest four Greek banks.