Greece tables law to tighten bank supervision

Greece will hand its central bank a tighter supervisory grip on its banks to shield the system from the fallout of a severe debt crisis, according to a draft law tabled on Tuesday.
The law would also ratify the new powers of the EFSF rescue mechanism. Euro zone leaders agreed on July 21 to allow the 440 bln euro ($625 bln) EFSF to give precautionary loans to countries under attack in the markets and buy sovereign bonds, in exceptional circumstances to prop up struggling states.
Many countries face hurdles in convincing sceptical parliaments at home to back the EFSF agreement, but the legislation is expected in about two weeks to pass Greece's 300-seat parliament, where the ruling socialists have a majority.
Debt-saddled Greece will likely be one of the first euro zone countries to pass into law the EFSF's wider remit, decided at the July summit where Athens secured a second, 109 bln euro bailout.
The main conservative opposition voted against the first, 110 bln euro rescue in May last year and continues to claim that the policy mix to get the country out of the crisis is wrong and only deepens the economic downturn.
Addressing the Greek parliament's economic and monetary affairs committee on Tuesday, Finance Minister Evangelos Venizelos urged deputies to pass the legislation.
"We must send a very clear message … that Greece honours, respects and implements everything it has accepted and signed without wavering," he said.
The draft bill says the EFSF constitutes the euro zone's answer to pressures from markets and that its quick activation is vital to the successful implementation of Greece's rescue programme.
The draft law also widens central bank powers in safeguarding the banking system's stability, including asking lenders to recapitalise via rights issues where existing shareholders waive their rights, which would dilute ownership.
"It is possible that there will be banks that face a problem sooner or later, and the law spells out an action plan to deal with such eventualities," said a banking analyst who did not want to be named.
The legislation aims to provide the central bank with fast tools to respond to lenders' capital adequacy shortfalls.
Shut out of wholesale funding markets and struggling with deposit outflows, bond writedowns and rising loan impairments as the economy contracts, the country's banks have been told to look into bolstering their financial strength through mergers.
A bid deal emerged last month when Greece's second and third-largest banks — Eurobank and Alpha — agreed to merge via a share swap to form the biggest group in southeast Europe, hoping to pry open the interbank market.
Dependent on the European Central Bank (ECB) for liquidity, Greek banks have borrowed more than 100 bln euros ($140 bln), and some have begun to tap more costly emergency funding (ELA) from the national central bank — the Bank of Greece .
The bill also provides for the creation of a bridge bank where assets and guaranteed deposits of a troubled lender can be transferred to protect depositors and the system's stability.
In such cases, a capital support safety net — the Financial Stability Fund (FSF) — will furnish the share capital of the new bridge bank, which cannot operate for more than two years.
Stripped of its healthy elements, the troubled lender effectively becomes a bad bank, headed for liquidation, with its remaining assets auctioned, the bill says.
The law gives the Bank of Greece the power to impose a commissioner on a bank's board of directors and require an equity injection.