An updated draft MoU dated on November 27 details the identification of Greek banks’ capital needs and their recapitalisation process. Note that the recapitalisation framework was released by MoF through by a cabinet ministerial act on November 12.

Regarding the identification of capital needs, the updated draft MoU notes that prior to the disbursement, the BoG has informed all banks, of their individual capital needs and has requested that they finalize the capital raising process by the end of April ‘13. The capital needs account for the impact of the valuation losses on new GGBs and results of a stress test exercise with a 3-year horizon (which took into account Blackrock credit loss projections and banks’ future pre-provisioning results).

By Q4’12, the Greek government and the BoG will align capital metrics to the minimum core tier I capital ratio of 9% set out in the EBA recommendation on capital buffers. Banks will also have to meet the requirements set by the BoG under Pillar II (to maintain a 7% core tier 1 capital ratio under a three-year adverse stress scenario). Furthermore, the BoG will publish a detailed report on the individual banks’ capital needs, recapitalization process and the methodology followed by Q4’12.

On the recapitalisation process, the draft MoU repeats that current or new shareholders will have control of the core banks, provided they are deemed fit and proper as already envisaged in the regulatory framework, and have subscribed no less than 10% of the capital to be raised by way of common shares. While existing shareholders will be diluted during the recapitalization process, they or new investors will be allowed to participate in the rights issues and should the above 10 percent threshold of private sector participation be reached, will receive warrants to acquire the remaining shares from the HFSF within five years.

On recent acquisitions and their impact on recapitalisation process, the draft MoU notes that subsidiaries have been recapitalized by their parent banks and agreements have been reached on the acquisition of Emporiki Bank and Geniki Bank by Alpha Bank and Piraeus Bank respectively, with a view to achieve further consolidation of the banking system while protecting the public sector from potential losses. Furthermore, authorities are expected to approve these acquisitions subsequent to the completion of the due diligence process, while these acquisitions will not require injection of additional public funds.

Regarding the recapitalisation process of core banks (i.e. Alpha Bank, Eurobank, National Bank and Piraeus Bank), the draft MoU notes it will involve three broad steps:

• First, the HFSF will provide sufficient funds in the form of bridge capital to bring the core banks up to the minimum level of 9% core Tier I under Pillar 1 by the end of December ‘12. The HFSF will also issue a commitment letter to subscribe to 100% of the remaining capital needs.

• In the second step, by the end of January ‘13, the HFSF will subscribe to 100% of any convertible instruments that the banks will decide to issue.

• In the third stage, by the end of April ’13, the core banks will complete the rights issue and any shares not subscribed by the private sector will be acquired by the HFSF subscription to the common equity.