European Commission approves prolongation of market conform asset protection scheme for banks in Greece

The European Commission has approved the prolongation of an existing Greek scheme aiming at supporting the reduction of non-performing loans of Greek banks on the basis that it remains free of any State aid.

The existing asset protection scheme (known by the name of ‘Hercules’), was approved by the Commission in October 2019, for an initial duration of 18 months. Greece notified the Commission of its plan to prolong the scheme for another 18 months, until October 2022.

The Commission found that, under the prolonged scheme, the Greek State will continue to be remunerated in line with market conditions for the risk it will assume by granting a guarantee on the senior tranche of securitised non-performing loans.

If a Member State intervenes as a private investor would do, and is remunerated for the risk assumed in a way a private investor would accept, such interventions do not constitute State aid. The Commission therefore concluded that the prolonged Greek measure does not involve State aid within the meaning of the EU rules.

Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “I welcome the prolongation of the Hercules scheme, which has already been very successful in providing a market conform solution to remove non-performing loans from the balance sheets of Greek banks, without granting aid or distorting competition. So that Greek banks can fully contribute to the recovery of the Greek economy”.

‘Hercules’ is designed to assist banks in securitising and moving non-performing loans off their balance sheets. Under the scheme, an individually managed, private securitisation vehicle will buy non-performing loans from the bank and sell notes to investors. The State will provide a public guarantee for the senior, less risky notes of the securitisation vehicle. In exchange, the State will receive a remuneration at market terms. The objective is to attract a wide range of investors and to support the banks in their ongoing efforts to reduce the amount of non-performing loans on their balance sheets.

Since the introduction of the scheme in October 2019, Greek banks have made significant progress in reducing the stock of their non-performing loans. In particular, Greece has estimated that, as a result of the introduction of the scheme, the non-performing loans ratio would have declined from 43% at the end of 2019 to 27% at the end of March 2021. The prolongation of the scheme for another 18 months will build on the success achieved so far, with the current applications to the scheme of securitizations totalling €31.3 billion of (gross book value) of non-performing loans.

The Commission’s assessment showed that the State guarantees will continue to be remunerated at market terms according to the risk taken, i.e. in a manner that would be acceptable for a private operator under market conditions. Like in the first 18 months of implementation of the ‘Hercules’ scheme, this is in particular ensured by the following elements:

  • First, the risk for the State will be limited since the State guarantee only applies to the senior tranche of the notes sold by the securitisation vehicle. An independent rating agency approved by the European Central Bank will determine the rating of the senior tranche.
  • Second, the State guarantee on the senior tranche will only become effective if more than half of the non-guaranteed and risk-bearing riskier tranches have been successfully sold to private market participants. This will ensure that the risk distribution of the tranches is tested and confirmed by the market before the State assumes any risk.
  • Third, the State’s remuneration for the risk taken will be market conform. The guarantee fee will be based on a market benchmark and correspond to the level and duration of the risk the State takes in granting the guarantee. This means that the guarantee fee paid will increase over time in line with the duration of the State’s exposure. This fee structure, in addition to the appointment of an external servicer, aims to increase the efficiency of the workout and likely recovery on the non-performing loans.

All these elements continue to be respected in the prolonged scheme. On this basis, the Commission was able to conclude that the measure remains free of State aid within the meaning of EU State aid rules.

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