Opinion of the European Central Bank of 25 February 2021 on the participation of the Hellenic Financial Stability Fund in increases in the capital of credit institutions for purposes other than precautionary recapitalisation or resolution (CON/2021/6)

OPINION OF THE EUROPEAN CENTRAL BANK of 25 February 2021 on the participation of the Hellenic Financial Stability Fund in increases in the capital of credit institutions for purposes other than precautionary recapitalisation or resolution (CON/2021/6) Introduction and legal basis

On 8 February 2021 the European Central Bank (ECB) received a request from the Greek Ministry of Finance for an opinion on a draft law on the participation of the Hellenic Financial Stability Fund (HFSF) in increases in the capital of credit institutions which cannot be characterised as capital support (for the purposes of precautionary recapitalisation) or as public financial support (as part of a resolution) (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the sixth indent of Article 2(1) of Council Decision 98/415/EC , as the draft law relates to rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1 The draft law enables the HFSF to decide in connection with a capital increase whether to: (i) exercise some or all of its pre-emption rights; (ii) subscribe, up to its existing shareholding percentage, for shares or other instruments of ownership issued as part of such capital increase (including capital increases where pre-emption rights have been waived or restricted); (iii) in the case of a credit institution which has been subject to a corporate reorganisation or group restructuring, participate, up to its existing shareholding percentage, in the issuance of new shares or other instruments of ownership by the relevant holding entity and/or the credit institution which will carry on the banking operations of the group, as the case may be; or (iv) to subscribe one or more unallocated shares resulting from a capital increase or from issuances of other instruments of ownership, if distributions of such shares or instruments are foreseen. In order for a capital increase to be eligible for the purposes of (i) to (iv) above: (a) it must be a credit institution or, in the case of

a corporate reorganisation or group restructuring, the holding entity and/or credit institution which will carry on the banking operations of the group that is increasing its capital; (b) the participation of the HFSF in that capital increase must not constitute capital support within the meaning of the Law on the HFSF ; and (c) private investors’ participation in that capital increase must be of real economic significance and on the same terms and conditions and, therefore, with the same level of risk and rewards (ie participation on a pari passu basis). 1.2 The draft law enables the HFSF, at its discretion and by decision of its General Council, to exercise the special veto rights referred to in the Law on the HFSF in order to prevent the issuance of shares or other instruments of ownership by the credit institutions in which it retains a holding or, if a credit institution has been subject to a corporate reorganisation or group restructuring, by the credit institution that will carry on the banking operations of the group or by the holding entities of credit institution(s), if the terms of that issuance waive or restrict the pre-emptive rights of the existing holders of shares or other instruments of ownership. The exercise of these special veto rights by the HFSF does not oblige the HFSF to exercise its pre-emptive rights in whole or in part, if subsequently a decision to launch a capital increase with pre-emptive rights is adopted. 1.3 The draft law provides that the participation of the HFSF in the capital increases set out in paragraph 1.1 above takes place by decision of its General Council, taken following a report by two independent financial advisors confirming that the proposed participation in the issue of new shares or other instruments of ownership contributes to maintaining, protecting or improving the value of the HFSF’s existing shareholding in the capital of the issuer or the prospects for divesting its shareholding, taking into account prevailing market conditions at the time and the business plan forecasts of the relevant credit institution at the time the credit institution decided to increase its share capital increase or issue other instruments of ownership. 1.4 The draft law also stipulates that the registration for, subscription for, and taking up of shares or other instruments of ownership by the HFSF in the context of these capital increases must be: (a) at an acquisition price not higher, and on terms not more onerous, than those applicable to the other shareholders of the issuer; (b) without prejudice to the existing rights of the HFSF arising from its framework agreements with credit institutions referred to in the Law on the HFSF ; and (c) financed exclusively from HFSF’s own liquid funds or from the reinvestment of the proceeds of a prior asset disposal. 1.5 The new shares or other instruments of ownership thus acquired must confer on the HFSF full shareholder or ownership rights, including voting rights, but shall not confer, inter alia, the special rights referred to in the Law on the HFSF . In the event of a partial divestment of its holdings in a

credit institution or holding entity by the HFSF, the ordinary shares or instruments of ownership acquired by the HFSF by the exercise of its rights under the draft law are deemed to be disposed of first, from among the other instruments of ownership of the same category HFSF holds in that credit institution or holding entity (‘last in, first out’), such that the special rights of the HFSF under the Law on the HFSF are maintained in full for as long as the HFSF continues to retain a participation in that credit institution or holding entity. 1.6 The draft law also provides that the new shares and/or other instruments of ownership acquired in the context of the HFSF’s participation as an investor in credit institutions may be disposed of by the HFSF by exemption from the rule to submit a mandatory takeover bid per Article 7 of Greek law 3461/2006 . 1.7 The current Law on the HFSF provides that for all types of divestments (be it decreases in its holdings via partial exercise of its pre-emptive rights in a capital increase or ordinary disposals of bank shares held by the HFSF), the acquisition price (for the former) and the sale price (for the latter) may be lower than the most recent price at which HFSF acquired shares or the current market price of the share, provided that such divestments fall within the mandate of the HFSF and there is a report of two independent financial advisors of esteemed reputation experienced in evaluating credit institutions and related matters. The draft law additionally provides that if this designated procedure is followed, this is deemed to constitute a diligent management of its property by the HFSF and that if this type of divestment proves ultimately detrimental to the HFSF’s property, criminal charges may only be brought if the HFSF itself decides to trigger a criminal prosecution under the relevant provisions of the Greek Criminal Code . 1.8 The draft law eliminates the provision in the Law on the HFSF that ascribes to the HFSF, together with the Greek State, priority ranking, compared to all other shareholders, in the proceeds from the liquidation of a credit institution. In addition, the draft law revises the description of the capital instruments listed in the Law on the HFSF (in the context of allocating the capital shortfall of a credit institution to holders of capital instruments, as deemed appropriate), so that this description follows the description of Articles 26 (Common Equity Tier 1 items) and 31 (capital instruments subscribed by public authorities in emergency situations) of Regulation (EU) No 575/2013 . 1.9 Finally, the draft law assigns the judicial and extra-judicial representation of the HFSF to the General Council of the HFSF for all matters except those listed in the Law on the HFSF in respect of which

the HFSF is represented by the Executive Board . The draft law also provides that HFSF’s General Council will be generally responsible for carrying out all tasks assigned to the HFSF, except for those tasks which have been expressly assigned to HFSF’s Executive Board.

2. General observations

2.1 The ECB welcomes the fact that the draft law enables the HFSF to participate going forward as an investor in share capital increases of a Greek credit institution for purposes other than to provide capital support to cover capital shortfalls in a resolution scenario or as a precautionary recapitalisation or as a public equity support measure. The ECB also welcomes the safeguards introduced by the requirement of the draft law that the HFSF must participate in such capital increases alongside private investor participation of real economic significance and under the same terms and conditions as those private investors, in line with the relevant Union legal framework. 2.2 The ECB welcomes the flexibility afforded to the HFSF to decrease its holdings by participating in such capital increases (for example by exercising only part of its pre-emptive rights in a capital increase, or by participating in capital increases where the pre-emptive rights are waived), while being in a position to subscribe for unallocated shares or other instruments of ownership issued in such capital increases. 2.3 The ECB considers that the above provisions of the draft law will contribute to the ability of Greek credit institutions in which the HFSF holds a participation to address both legacy vulnerabilities and additional challenges that may arise from the impact of COVID-19 on the asset quality and capital adequacy of Greek credit institutions and from a future gradual lifting of the protective measures that have been taken by the Greek State in response to them to date. These provisions of the draft law should facilitate Greek credit institutions in their strategies to attract additional capital at market conditions, while at the same time affording them flexibility in their relevant planning for possible corporate reorganisations within their banking groups. In that context, it is also important that the draft law allows the HFSF to participate in offerings of shares or other instruments of ownership irrespective of whether the issuer and/or offeror of such shares or instruments is the credit institution itself or the holding entity of the credit institution following a reorganisation of the banking group (e.g. following a ‘hive-down’ restructuring). At the same time, the ECB recognises the divestment of shares held in credit institutions as a strategic objective of the HFSF for the medium term and in line with its mandate so that Greek credit institutions gradually return to private ownership. The ECB wishes to emphasise the importance it attaches to the stability of the financial system in Greece and to the need to strengthen the intermediary role of the banking system to finance the real economy and support economic growth, while restoring access to market-based capital for credit institutions on commercial terms .

2.4 The ECB welcomes the provisions of the draft law aligning the classification of the HFSF shares in credit institutions with the provisions of Regulation (EU) 575/2013. 2.5 The ECB reiterates the importance for independent decision-making by the HFSF bodies, which is ensured by the envisaged amendment regarding the judicial and extra-judicial representation of the HFSF by the General Council that also contributes to a clear allocation of competences and responsibilities among the HFSF decision-making bodies. Any amendment to the HFSF’s governance structure should be geared towards enabling the HFSF to pursue effectively and deliver on its critical mandate to maintain the stability of the Greek banking system, while minimising costs for taxpayers .

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 25 February 2021.

[signed]

The President of the ECB

Christine LAGARDE