The Greek government plans to extend a package to provide liquidity to the banking sector and will also create a fund to guarantee banks' solvency as part of a multi-billion euro aid package, EU and IMF officials said.
The banking system had limited exposure to the toxic assets that hit financial institutions elsewhere in Europe during the 2008 financial crisis and is well capitalised.
But a government austerity programme, forecast to push gross domestic product (GDP) down by 4 per cent this year, is bound to increase the number of non-performing loans on Greek banks' books, raising risks to the sector.
In addition, the banks have major exposure to Greek government bonds, which have been repeatedly downgraded by credit ratings agencies, and rely on them as collateral to obtain liquidity from the European Central Bank.
Servaas Deroose, a top official in the European Commission's directorate for economic and financial affairs, told a news conference that Greek authorities were in talks with Brussels to extend a €28 billion support facility first agreed in early 2009 to address tight bank liquidity conditions.
"There will be an extension in size and duration of the banking scheme," he said. "It's a question of days."
The banks asked the government last month to get more funds from the support scheme, fuelling financial market concerns about the solvency of the Greek financial system.
Separately, the government is looking at creating an independent fund to ensure bank equity levels remain sound, as part of an EU/IMF aid package.
"The objective of the fund will be to ensure that the Greek banks are well capitalised at all times," Deroose said. "The fund will inject capital in a bank if its capital adequacy ratio falls below a minimum level and when existing shareholders cannot raise capital from the markets."
Mr Deroose said the fund would be fully independent of the government but would work closely with the Bank of Greece. He declined to say how large it would be.
"The purpose of the fund is not to provide liquidity. It's only for solvency reasons that the fund will be created," he said.
The banking system's equity base rose to €33 billion in 2009 and the average capital adequacy ratio of the sector stood at a comfortable 11.7 per cent at the end of last year.
But both Standard & Poor's and Moody's cut the ratings of leading Greek banks last week, citing the impact of the country's troubled economy on their financial condition.
Poul Thomsen, IMF mission chief for Greece, said stress tests conducted on Greek banks showed they were well capitalised. He said the tests were aimed at getting an idea of how much capital banks would need if non-performing loans went up.
"I am surprised about the number, that it's not higher, and it comes back to that the system is well capitalised. That's encouraging," he said. "It's the advantage of having a more old-fashioned banking sytem that did not play all the risks."
Mr Thomsen said a GDP contraction would put pressure on the sector.
"Clearly with this dramatic programme, the contraction in nominal GDP, we do expect to see an increase in non-performing loans."
Reuters