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The European Central Bank announced today the stress tests results of the four Greek systemic banks, namely Alpha Bank, the National Bank of Greece, Piraeus Bank and Eurobank. According to them, the total capital deficit is 4.4 billion euro under the baseline scenario and 14.4 billion euro under the worst-case scenario.

In particular, the banks’ capital requirements are as follows:

- Alpha Bank: 263 million euro under the baseline scenario and 2.74 billion euro under the worst-case scenario,
- Eurobank: 339 million euro and 2.12 billion euro respectively,
- National Bank of Greece: 1.58 billion euro and 4.6 billion euro,
- Piraeus Bank: 2.21 billion euro and 4.93 billion euro.

The banks' managements expressed satisfaction with the results, emphasizing that they reflect the sustainability of the sector in a very difficult and challenging environment. All four systemic banks expressed optimism that they would attract capital that would surpass the expectations of the baseline scenario. The two banks with the lowest capital requirements under the worst-case scenario, Eurobank and Alpha Bank, say they would be able to cover them as well.

The management boards are due to meet to trigger the procedures to increase the share capital.

It is estimated that banks should cover their total capital requirements under the most unfavourable scenario. Actually, they would have to cover at least the amount under the baseline scenario.

If a bank covered its total capital requirements it would keep its private nature. If it covered only its basic requirements, then the European authorities would proceed with the distribution of losses among bondholders. The size of the impact would depend on the state aid. The more state aid a bank receives, the greater the impact will be on bondholders.

If the bank did not meet the requirements under the baseline scenario, then it would proceed to liquidation and would be recapitalised by the state.

Suppose a bank has capital requirements amounting to 5 billion euro under the worst-case scenario and 2.5 billion euro under the baseline scenario of the stress tests. This amount would have to be reduced by 1.5 billion euro, for example - 800 million euro under the proposal for bond exchange submitted by the bank and 700 million euro for the formation of internal capital (estimated profits, sale of assets, etc.). Thus, the net capital requirements would amount to 3.5 billion euro under the worst-case scenario and 1 billion euro under the baseline scenario. The bank would have to proceed to a capital increase to 3.5 billion euro in order to achieve the greatest possible involvement of private shareholders. If it raised 1 billion euro it would be in liquidation. If it raised a little more than 1 billion and required another 2.5 billion euro from the state, then the impact on bondholders would be great. If it raised 2.5 billion euro from the market and required 1 billion euro from the state, the impact on bondholders would not be great.

Meanwhile, the parliament will vote on the new law on recapitalisation today, but many of the key issues are pending. It contains provisions that will lead to radical changes in the managements of banks and the Financial Stability Fund and envisages the involvement of institutional investors in cooperative banks that will also be entitled to recapitalisation from the Financial Stability Fund.

The controversial issues are the fate of the preferred shares of the state, the impact on bondholders in the event that state aid is required and the proportion of special convertible bonds (Coco's) and the common shares that will cover the participation of the Financial Stability Fund.

These key issues need to be clarified as they could prevent private participation otherwise. The issue of preference shares is causing conflicts because Piraeus Bank and Alpha Bank have proceeded to repay them whereas the National Bank and Eurobank are retaining them.