Despite the progress that has been made in dealing with the problem of bad loans, there is no room for complacency, warned the Governor of the Bank of Greece.

Speaking at a conference in Lake Como, Italy, Mr. Stournaras emphasized that Greek banks have now managed to reduce the ratio of bad loans to just over 5%, but there are still risks to financial stability.

Specifically, as he mentioned, the rise in interest rates in the last period, alongside high inflation rates, put pressure on the balance sheets of some businesses and households. With these data – and despite the recent reduction in interest rates – it cannot be ruled out that European banks will face a deterioration in the quality of their assets and the need to form increased provisions.

In addition, as he pointed out, the combination of low rates of economic growth and high interest rates could adversely affect the demand for new loans and the implementation of the banks’ business plans.

Finally, as he observed, the increase in borrowing costs in recent quarters has led to a weakening of the dynamics of the real estate market in the euro area, especially in the commercial real estate segment. Falling property prices could expose some construction groups to losses and subsequently affect the cost of credit risk for some European banks.

Referring to the Greek experience, Mr. Stournaras praised the role played by the HERACLES program in reducing bad loans.

As he specifically argued, the implementation of the “Hercules” program in Greece offered a clear benefit, because it contributed to the rapid consolidation of banks’ balance sheets. Prior to the introduction of this scheme, banks were unable to materially improve their asset quality and the reduction in bad loans came mainly from loan write-offs.

“The implementation of “Hercules” has completely changed the landscape (also for LSIs, where as a rule the management of Non-Performing Loans is even more difficult). As a result, the banks recorded significant losses, but they were lower compared to direct loan sales.

At the same time, the banks benefited from a reduction in capital requirements, as the high priority securities that remain in their portfolio are guaranteed by the Greek State and, therefore, have a zero risk weighting factor”, he pointed out.