The European Commission has approved the re-introduction of a Greek scheme (known as ‘Hercules’) aimed at supporting the reduction of non-performing loans of Greek banks, as it does not involve State aid.
‘Hercules’ scheme
The scheme is a re-introduction of a measure that the Commission initially approved in October 2019 (SA.53519), for a duration of 18 months and prolonged in April 2021 (SA.62242), which expired on 9 October 2022. Greece notified its plans to re-introduce the scheme, which will run until the end of December 2024.
The scheme aims at assisting banks in securitising and moving non-performing loans off their balance sheets. Under the scheme, a private special purpose vehicle will buy non-performing loans from the banks 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.
All four most significant Greek banks which benefitted from the scheme observed a drastic reduction in the stock of their non-performing loans. In particular, it is estimated that, as a result of the implementation of the scheme, the non-performing loans ratio reduced from 42% in September 2019, to 8.7% at the end of 2022 (corresponding to non-performing loans securitisations of €49.5 billion gross book value). The re-introduction of the scheme will build on the success achieved so far, which may also incentivise less-significant Greek banks to apply to the scheme.
Commission’s assessment
The re-introduced scheme remains designed in a way to ensure that the Greek State will 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, and is remunerated for the risk assumed in a way a private investor would accept, such interventions do not constitute State aid.
The Commission assessed the scheme and found 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 the current market conditions. This is 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 will be market conform. The guarantee fee will be based on a market benchmark and proportionate to the level and duration of the risk. This means that the guarantee fee paid will increase over time in line with the duration of the State’s exposure. The remuneration is adjusted to reflect the current market developments in Greece. 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.
On this basis, the Commission concluded that the measure is free of State aid within the meaning of EU State aid rules.
Background
There are several possibilities for Member States to implement impaired asset measures to deal with non-performing loans in line with EU rules both with and without the use of State aid.
The Commission has developed a blueprint that provides practical, non-binding guidance to Member States for the design and set-up of impaired asset measures. The blueprint clarifies the permissible design of asset management companies (AMCs) receiving public support – like the special purpose vehicle in the present scheme – under the EU legal framework, in particular the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR) and EU State aid rules.
The choice of the type of intervention lies with the Member State and it is always the decision of the Member State whether to grant any State aid. The Commission, as the body responsible for EU State aid control, has to ensure that any measure implemented is in line with EU rules. If a Member State chooses to intervene as a private investor would do, then such an intervention would not constitute State aid and falls outside of EU State aid control.
In February 2016, the Commission approved, under EU State aid rules, an Italian guarantee scheme to facilitate the securitisation of non-performing loans (Fondo di Garanzia sulla Cartolarizzazione delle Sofferenze – GACS). The scheme, which is similar to the ‘Hercules’ scheme re-introduced today, was prolonged four times, last on 14 June 2021. Up to June 2022, the GACS scheme has removed approximately €100 billion (gross book value) of non-performing loans from the Italian banking system.
For More Information
The non-confidential version of this decision will be made available under the case number SA.109635 in the State Aid Register on the competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the Competition Weekly e-News.
Quotes
The Hercules scheme has already successfully contributed to the lifting of the burden of non-performing loans from the balance sheets of Greek banks. Its reintroduction will now enable Greece to provide further market conform guarantees that do not distort competition. In turn, this will allow Greek banks to concentrate on contributing to the growth of the Greek economy.