The Greek Credit Tragedy and The New Ethos in Banking
There is no debate on ethos without looking at its origins, Greece, as there is no chance to discuss The New Ethos in Banking and an interpretation of Aristotle’s rhetoric triangle without involving the Greek banking sector.
One of my friends, Alexandros Efstratoglou, of Relational FS, reached out to me because he had a story to share. As always, every story on the New Ethos in Banking intrigues me. Alexandros asked me if I knew why there are 3 big international Greek companies in the software business of non-performing loans (NPL), Relational FS being one of them.
Now I got inquisitive.
How it started
You may know that for a long list of reasons, one of the countries that suffered the most in the aftermath of the Global Financial Crisis was Greece. The Greek crisis, as it was called, led to impoverishment and loss of income and property. Well-educated Greeks fled the country, and social exclusion increased, all because of the sudden reforms that came with bailouts from the European Commission, European Central Bank and the IMF.
Going back to Alexandros’ question: the Greek crisis also led to 45%-50% (150 billion euros worth) of non-performing loans in 2010, he explained. One out of two loans defaulted in the country in 2010 because of a lack of regulation, people’s mentality, the financial crisis that started to hit the country hard, and a financial industry that had until then stimulated consumption by actively promoting credit cards and consumer loans to everyone, without strict credit policies.
It took until 2017 for banks to issue the first major NPL auction to clean up their balance sheet because this first required 7 years of negotiations and regulatory reforms.
Still today, the process of issuing the NPL on the primary market is so cumbersome that it takes 2-3 years after the first unpaid instalment for banks to actually sell the NPL, further reducing the quality of the loan.
Within the past years, the Greek NPL landscape has changed significantly with Major Credit Management Services Companies, so-called “Debt Servicers” like Intrum, DoValue, and Veraltis Asset Management, and investors such as Bain Capital and Apollo entering the Greek market to benefit from the situation.
The investors, alongside the Debt Servicers, buy NPL portfolios, restructure the loans, (especially the corporate ones aka “Single Tickets”) and sell them back to the bank or other interested parties. The corporation, flagged at risk, suddenly becomes a creditworthy customer again. This is a win-win-win scenario: banks release capital and improve their balance sheets, Debt Servicers & investors acquire big loan portfolios with significant discounts, and the corporation hopefully ends up being financially healthy again.
It takes skill and expertise to turn around the business, which explains why this knowledge became a Greek export product. This is also why in the industry, the restructurers are called ‘corporate artists’. These people investigate refinancing opportunities and bridge loans, but also evaluate how to transform the company’s business model and cost structures.
They work for these Debt Servicers, not for banks.
The impact on banks
After restructuring the loans, these corporations trigger interest from the banking industry again, completely eroding the role of a bank as a financial intermediary for the wider Greek society. Banks no longer give oxygen to the economy but only look for safe assets to feed their deposit business.
Going back to ethos and a bank’s role in society, it seems like banks got out of the financial crisis completely traumatised, unable to properly manage the risk as expected from the bank. Then again, can we blame them, knowing that of the 40 banks that existed before the crisis, only 4, the so-called systemic Banks, remained according to Alexandros?
To ensure sufficient financing opportunities in a somehow frozen bank market, there is currently a new regulation that allows Debt Servicers to become lenders themselves.
The future will tell whether that is the right answer to tightening liquidity in the market, as these organisations and their corporate artists target the companies at the point of not getting a loan at a bank. They target companies happy to pay double the market standard if that grants them access to cash.
When I asked Alexandros how all this relates to ethos, he shared: “I really liked what I heard from the Chairwoman of vdk bank at your conference, that banking is about realising dreams. Whether through a mortgage loan, a corporate loan or something else, they want to drive things forward. That is what ethos is about for me. Banks have, especially in Greece, lost that momentum because they didn’t have the respective capital buffers”.
This is a really interesting case where the rhetoric triangle lost balance with Logos, which affected Pathos and Ethos. Banks mismanaged their credit risks, a problem that was magnified by the financial crisis. Because of that mismanagement, banks couldn’t be fast enough to restructure and get rid of non-performing loans, instead of supporting their clients in times of financial stress.
They were in survival mode and lost connection with society. That, in turn, led to a loss of respect and trust, which forced the Greek government to now adapt regulations so that non-bank institutions could start issuing loans to help people realise their dreams.
Will this shadow circuit of loan provision be the right strategy going forward?
Banks exist because they transform short-term deposits into long-term loans. If one of those elements falls out of the equation, then what is the role of a bank?
Alexandros: “I believe the main topic for banks regarding ethos is to make dreams come true. Even in the context of ethos – logos and pathos – the mission is to continue supporting the real economy, with a healthy risk appetite and in service of the customer”.
I ended my talk by asking whether he believes banks should rewrite their narrative, to which he answered: “Banks need to go back to their roots. In Greece, the non-performing loans of most big banks have been carved out, and entire departments, including both personnel and assets, have been transferred to the respective Debt Servicers. Banks got rid of most of their NPL. Now it is time for them to play their societal role again, respecting the limits set by the supervisor, and realise the dreams of their clients”.
Note: this story is based on my talk with Alexandros in October, before the news from Greece that the Hellenic Financial Stability Fund is accelerating its efforts to sell its shares in banks, as lenders have been recovering.
In October it sold a 9% stake in Europank to Unicredit and in November it announced its ambition to sell 20% of National Bank of Greece, valued at 1 billion euros. The fund hoped to sell off all its holdings in Greek banks by the end of 2025, according the of The National Herald.