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Memorandum of Understanding on Specific Economic Policy Conditionality3. Framework for strengthening and restructuring thebanking system1. The Government ensures that no state aid will be granted to banks before it is approved bythe European Commission under state aid rules.3.1. Framework for strengthening and restructuring the banking systemPrior to disbursement, the Authorities:a. Adopt legislation governing the injection of public sector resources into the banksthrough the HFSF, under which the HFSF will provide capital to viable banks that –after having exhausted the possibility to generate capital through internal measures andthrough private capital raising - fail to meet the capital needs determined by the stresstests.Other ActionsFollowing the announcement of the results of 2013 stress test exercise, the authorities commit totaking the following steps:1. By June 2014 banks have to meet their capital needs under the baseline scenario, based oncapital-raising plans that they must submit to the BoG for approval by April 2014. Theupfront capital raising under the baseline scenario is based on mitigating actions, but onlythose included in banks’ current restructuring plans along with any further mitigatingactions agreed with the European Commission as commitments in the revisedrestructuring plans, which the BoG will take into account for recalculating capital needs.Further, banks have until May 2014 to submit capital-raising plans addressing the adversescenario, for approval by the BoG by June 2014.2. To set aside the resources of the HFSF as a buffer against possible capital shortfalls thatcould materialize in the stress test horizon, or as a result of the SSM comprehensiveassessment exercise (continuous). These form part of a credible backstop, together withthe support of Euro Area Member States.3. Stand ready to take all necessary policy actions to safeguard overall financial stability andremain committed to a four-pillar banking sector, and the results of the stress test haveconfirmed that this commitment is appropriate (continuous). The SSM assessment in2014 provides an opportunity in late-2014 to assess progress and confirm thatcapitalization remains sound.4. Initiate the swift process of share capital increase of Eurobank. The calling of anextraordinary shareholders’ assembly of Eurobank, to be take place by end-April 2014,will be approved by the HFSF in order to initiate the share capital increase under the newrecapitalization framework. The HFSF will reduce its stake in Eurobank significantly. Theoverriding objectives are to strengthen the bank's capital base as soon as possible, attract,in a competitive process, anchor investors that would play an active role in the bank’smanagement and balance sheet repair, and achieve a strong private sector participation inthe transaction, marking the return of the banking sector to capital markets as a sign of itsnascent recovery.188
Memorandum of Understanding on Specific Economic Policy Conditionality3.2. FundingThe BoG commits to:1. Stand ready, following the procedures and rules of the Eurosystem, to continue disbursingadequate and appropriate emergency liquidity support in a timely manner, if needed, whileexpecting banks to achieve a sustainable funding model over the medium term(continuous). In this context, banks have submitted their funding plans to the BoG, andwill be required to update their plans on a quarterly basis to allow for continuousmonitoring and assessment of their efforts.3.3. Enhancing supervision and the management of troubled assetsThe BoG commits to:1. Introduce KPIs to monitor banks' progress in reducing their large NPL portfolios. Bankswill begin gradual reporting under these KPIs by June 2014, with full reporting tocommence from end-2014.2. Report on the appropriateness of banks’ loan forbearance practices and recognition ofincome from NPLs by July 2014.3. Assess, based on the results of the ECB’s comprehensive assessment, the need tointroduce impairment provisioning guidelines similar to some other EU supervisoryauthorities and if guidelines are deemed necessary, introduce them in time forconsideration in the 2014 end-year accounts.4. Evaluate options for improving recovery from assets under liquidation and will implementin full the recommendations of technical assistance to this end by June 2014.5. Undertake a review of the BoG's supervisory model, legal powers, governance structuresand the enforcement toolkit, in consultation with EC/ECB/IMF by June 2014.6. Introduce appropriate legislative or regulatory changes by September 2014.7. Prepare, as part of this review, by June 2014 a self–assessment of the Basel CorePrinciples (BCP) that are pertinent to the issues that will remain under the nationalsupervisory mandate, in advance of the IMF’s stand-alone BCP assessment, which is to becompleted by end-September 2014.Take the following steps to enhance the effectiveness of supervision:8. Revise the BoG's organizational structure and internal governance processes, inpreparation for transfer of supervisory responsibility to SSM by September 2014.9. Engage specialists to assist the BoG with the supervision of NPL portfolios by May 2014.10. Assess the impact of the introduction of the EBA guidelines on definitions of NPLs andforbearance and require banks to adopt the guidelines by June 2014.The Government commits to:1. Address restrictions on hiring experienced staff in the BoG in a manner that preserves staffautonomy and the financial independence of the BoG by April 2014.3.4. Improving debt resolution processes1. The Authorities have established the Government Council for the Management of PrivateDebt ("The Council) which will coordinate legal and institutional reforms to enhancecorporate and personal debt resolution frameworks, in consultation with the EC/ECB/IMFstaff.2. The Council has agreed its expenditure budget for 2014. Under the Secretary General forConsumer Protection, engaged project management, public relations, and technical189
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OUTLINE OF THE REPORTEXECUTIVE SUMM
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LIST OF GRAPHSGraph 1. Economic cli
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ACKNOWLEDGEMENTSThe report was prep
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European CommissionThe Economic Adj
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1. INTRODUCTION1. INTRODUCTION1. Th
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2. MACROECONOMIC AND FINANCIAL DEVE
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2. Macroeconomic and financial deve
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Chart 3Graph 2.3. Exports of goods
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European CommissionThe Second Econo
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Chart 17Graph 11.1 labour reform in
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Chart 18Graph 13.1. Distance to Fro
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4. DEBT SUSTAINABILITY ANALYSIS AND
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4. Debt sustainability analysis and
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4. Debt sustainability analysis and
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Table 12. List of Milestones to be
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ANNEX 2: MACROECONOMIC FORECASTANNE
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ANNEXTable B1: USE AND SUPPLY OF GO
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