Published July 23, 2012
Banks recapitalized as part of Greece's bailout may be forced to overhaul their management and governance, the European Commission said, in response to questions raised by Reuters about alleged malpractice at Greece's fourth-largest bank.
In a statement, the European Union's executive arm said Greek banks would face due-diligence audits and possible management shake-ups in return for their share of billions of euros from the region's taxpayers and the International Monetary Fund.
"The recapitalization process will entail a significant revamp of corporate governance structures and management practices in banks where malpractice has occurred," said Antoine Colombani, the Commission's spokesman on competition and antitrust issues.
The Commission was responding to a Reuters article of July 16 which reported that the chairman of Piraeus Bank <BOPr.AT>, Michael Sallas, and his children had taken out loans of more than 100 million euros to secretly buy shares representing an undeclared family stake in the bank of more than 6 percent.
The purchases, conducted as part of an 800-million-euro Piraeus rights issue in January 2011 designed to strengthen the bank's capital base, were made via offshore companies owned by Sallas and his two children, according to audit documents seen by Reuters. The transactions were not declared to the Athens Stock Exchange by the bank.
The evidence of secretive self-purchasing of bank stock with borrowed money has raised questions about corporate oversight, especially at a time when European taxpayers and the International Monetary Fund have committed 48 billion euros to bailing out Greece's banks, including Piraeus.
In a series of articles about alleged mismanagement at three Greek banks, Reuters also reported in April that Piraeus had not disclosed it had rented properties from private companies run by the Sallas family. The bank has sued Reuters for defamation over the story, claiming 50 million euros in damages.
Sallas, who stepped down as executive chairman of Piraeus last month but remains its non-executive chairman, has declined to respond to questions from Reuters about the share loans.
In a written response to questions, the European Commission, the EU's executive and a party to Greece's 130-billion-euro ($156 billion) bailout, said it was following the issue in conjunction with Greek authorities.
"We understand that the national authorities are enquiring into the transaction to verify whether any regulatory provisions have been breached," said Colombani.
"In the meantime, we are aware that Mr Sallas is not in the executive board of the bank anymore."
The competition authority is one of several Commission departments involved in monitoring Greece's bailout obligations, including whether EU rules on state aid are being met. Under those rules, EU regulators can force an institution such as a bank to make management changes or even be wound up.
Colombani said the recapitalization of Greek banks, which involves funds from the euro zone's bailout fund being transferred to a Greek-administered facility called the Hellenic Financial Stability Fund, would be tightly monitored, a process that could include demands for management changes.
"The Hellenic Financial Stability Fund is already conducting due diligence in the banks to be recapitalized by the program funds," he added, referring to the funds being transferred from the euro zone's EFSF facility.
Colombani declined to say which banks could face action. The top four banks in Greece - National Bank of Greece <NBGr.AT>, Eurobank <EFGr.AT>, Alpha Bank <ACBr.AT> and Piraeus - offered no immediate comment on the Commission's statement. "The bank could not be affected because it has nothing to do with such issues," said a Eurobank official who declined to be named.
The Bank of Greece, which has primary responsibility for regulating Greek banks, has declined to comment on Sallas's holdings in Piraeus, citing confidentiality guidelines.
"Our supervision department cannot comment on specific prudential data available or actions taken with regard to any specific bank," a spokesman said earlier this month.
But Greek economists, academics and politicians have been outspoken about the apparent lack of oversight in the banking sector, which was forced to the point of collapse after the restructuring of Greek government debt in February.
"A vital part of the Herculean task of the reform project in Greece should be governance reform," said Michael Jacobides, an associate professor at the London Business School.
"Resistance is rife as change would require, among other things, unsettling cozy habits of Greece's business elite, or severing mutually beneficial ties between business leaders and politicians," said Jacobides, a Greek national.
As well as demands for tighter regulation, questions have been raised about the actions of inspectors from the EU, IMF and the European Central Bank, together known as the troika, who are responsible for on-the-ground monitoring of the bailout.
With a staff of only around 80-100 people in Athens, the troika has tended to focus on the strict economic targets the Greek government must meet under the terms of the bailout, rather than nitty-gritty banking sector reform. But that may have to change for effective policing of the rescue.
"Much external pressure will be needed to identify governance problems and potential business scandals across the board," said Jacobides. "The troika will have its hands full. But if it succeeds, it will massively benefit the Greek economy."
Officials in Germany, which as the largest economy in Europe is the biggest underwriter of Greece's bailout, expressed alarm at the apparent lack of oversight in the Greek banking sector.
"These kind of incidents must be explained," Klaus-Peter Flosbach, a finance expert for Chancellor Angela Merkel's conservatives, said in response to the evidence of self-dealing in Piraeus shares by Sallas and his family.
"We need transparency in the Greek banking sector and effective financial supervision," he said, adding it was the primary responsibility of Greek authorities to provide it.
"This is also in Greek interests. Otherwise no trust in the Greek financial market can be built up."
For the European Commission, the first priority is the recapitalization of Greece's banking sector, which had to write down the value of its holdings of Greek government bonds by nearly 70 percent as part of the debt restructuring - a move that wiped out a significant portion of the capital base.
"The recovery of the Greek economy will not be possible without a strong and well-capitalized banking sector," said Colombani, the Commission's competition spokesman.
"Mostly as a result of the deterioration in the economy and the impact of PSI (private sector involvement in the debt restructuring), most Greek banks have seen a large share of their capital base eroded."
But officials say recapitalization is unlikely to be sufficient without much more intense monitoring of how Greek banks operate and manage their finances.
Opposition politicians in Greece, including those from SYRIZA, the left-wing alliance that came second in the election in June, said they would not rest until oversight was tightened.
"We are seriously concerned with the lack of transparency and regulation in the Greek banking sector," said Yannis Dragasakis, a SYRIZA member of parliament.
"We are considering bringing the matter of bank transparency to parliament."