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Greece’s four main banks must raise 14.4 billion euros ($15.9 billion) in fresh capital, the European Central Bank said, as investors and taxpayers face the cost of repairing the damage from six months of wrangling between the nation’s government and its creditors.

An asset-quality review carried out by the ECB resulted in valuation adjustments of 9.2 billion euros for the National Bank of Greece SA, Piraeus Bank SA, Eurobank Ergasias SA and Alpha Bank AE, the Frankfurt-based supervisor said Saturday in a statement. The banks’ capital gap amounted to 14.4 billion euros under a simulated stress test scenario, and 4.4 billion euros under baseline macroeconomic assumptions. The four banks will have to submit recapitalization plans to the ECB’s supervisory arm by Nov. 6.

“Covering the shortfalls by raising capital would then result in the creation of prudential buffers in the four Greek banks, which will facilitate their capacity to address potential adverse macroeconomic shocks,” the ECB said in the statement, adding that a minimum of 4.4 billion euros, corresponding to the AQR and baseline shortfall, is expected to be covered by private means.

The capital shortfall is “significantly lower than feared,” German Deputy Finance Minister Jens Spahn said, while U.S. undersecretary for international affairs Nathan Sheets said in an interview before the results that the health of the Greek financial system is now “clearly better” than a few months ago.

National Bank of Greece, the country’s biggest bank by assets, has a total capital shortfall of 4.6 billion euros, including 1.6 billion from the baseline scenario.

Piraeus has the biggest shortfall of all the lenders, and needs to raise 2.2 billion euros under the baseline scenario, and 4.9 billion euros in total. Piraeus reported on Saturday a net loss of 635 million euros in the first nine months of the year and an accelerating pace in the formation of sour loans.

a net loss of 635 million euros in the first nine months of the year and an accelerating pace in the formation of sour loans. Alpha Bank only needs to raise 263 million euros under the baseline scenario, out of a total shortfall of 2.7 billion euros.

Eurobank has the lowest aggregate shortfall, totaling 2.2 billion euros, with 339 million euros corresponding to the baseline scenario.

Attica Bank has a shortfall of 857 million euros in the baseline scenario and 1 billion euros in the adverse scenario, according to a separate comprehensive assessment conducted for the small lender by the Athens-based central bank.





“Alpha expectedly fared best and Piraeus expectedly fared worst,” Paris Mantzavras, analyst at Athens-based Pantelakis Securities wrote in a note to clients after the publication of the results. “Compared to our market estimates for the total capital bill, Eurobank is a positive surprise and National Bank a negative one.”

The European Commission said in a statement that it is “encouraged” by the results, while Eurobank’s Chief Executive Officer Fokion Karavias said that the lender’s capital needs under the stress test’s adverse scenario are “fully manageable.” Alpha Bank, in a filing to the stock exchange, said the result “demonstrates resilience,” despite “higher hurdle rates and the repayment of 940 million euros of state preference shares in 2014, which further improved the quality of capital.”

Bail-Out Agreement

The government of Prime Minister Alexis Tsipras and Greece’s European creditors reached a bail-out agreement this summer after months of wrangling that brought the country to the brink of leaving the currency union and resulted in capital controls. Recapitalizing the country’s lenders, after a month-long forced shutdown in July and record deposit bleeding, is the first step to restart the country’s economy, which is still crippled by restrictions on transfers of capital and ATM withdrawals.

Lenders will ask their shareholders and bondholders to voluntarily offer to plug any holes identified by the ECB, before resorting to a 25 billion-euro state backstop, according to a bank recapitalization bill which the Greek Parliament approved on Saturday. Taxpayers’ funds will come from euro-area emergency loans under Greece’s latest bailout agreement.

Common and preferred stock as well as other financing instruments, including unsecured senior liabilities, can be bailed in before a financial institution is eligible to use the public backstop of the state-owned recapitalization fund to cover its shortfall, according to the bill. Eurobank, Alpha Bank, and Piraeus have already extended swap offers to their bondholders, as they seek to reduce liabilities and boost their capital.

A spokesman for the European Stability Mechanism -- the currency union’s crisis loans fund -- said that Greece can “quickly” use 10 billion euros which have been mobilized for Greek bank recapitalizations and are currently sitting in a segregated account. With sufficient private-sector participation, the remaining 15 billion euros, which have been earmarked for capital injections under the terms of the bailout, will not be needed, the spokesman added, asking not to be named in line with policy. This will also mean that Greece may not use the full 86 billion euros envisaged back in July.

“Capital shortfalls under the baseline scenario, which may be further reduced by the currently ongoing liability management exercises by the Greek banks and the restructuring plans to be submitted to the ECB, are manageable,” analysts at Athens-based Euroxx Securities Vangelis Karanikas and Yiannis Sinapis wrote in a note to clients. “All Greek banks should be able to cover the AQR and baseline needs through the private sector.”

Recapitalization Terms

The new recapitalization legislation empowers the state-owned Hellenic Financial Stability Fund to regularly evaluate the management and boards of Greek lenders that seek state aid. Board members in Greek banks must have 10 years of international banking or finance experience, of which three years as board members. At least one board member should have five years or more experience in bad loans management, and three independent board members, who will be presiding over all committees, mustn’t have worked in a Greece-based bank during the past 10 years.

Officials who have served in senior political or public-sector posts over the past five years are banned from being appointed board members. No bonuses will be distributed while a lender receives state aid and salaries of management are capped at the level of the annual compensation of the governor of the Bank of Greece, according to the legislation.

With assets totaling 296 billion euros at the end of June, the four banks tested by the ECB account for about 90 percent of the assets of credit institutions in Greece, the ECB said. Attica Bank, which isn’t considered a systemically significant lender, was assessed by the Bank of Greece, which identified a 1 billion-euro shortfall. The recapitalization bill which was approved Saturday allows HFSF to participate in capital raising actions of smaller banks and not just the four biggest ones.

“The shortfall number was in line with our expectation,” Jonas Floriani, a London-based analyst with Keefe, Bruyette & Woods, said in an e-mail. “The key now will be the capital plans and the recap framework.”