Opinion of the European Central Bank of 11 May 2022 on the divestment strategy, governance structure and special rights of the Hellenic Financial Stability Fund (CON/2022/18)

OPINION OF THE EUROPEAN CENTRAL BANK of 11 May 2022 on the divestment strategy, governance structure and special rights of the Hellenic Financial Stability Fund (CON/2022/18) Introduction and legal basis

On 21 April 2022 the European Central Bank (ECB) received a request from the Greek Minister for Finance for an opinion on a draft law amending the Law on the Hellenic Financial Stability Fund (HFSF) (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, and the tasks conferred upon the ECB pursuant to Article 127(6) of the Treaty concerning the prudential supervision of credit institutions. 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 Divestment-related amendments 1.1.1 The draft law amends the Law on the HFSF in three main respects. First, the draft law amends the Law on the HFSF as concerns the HFSF’s divestment strategy. In this respect, the draft law elevates the divestment of the HFSF’s holdings in credit institutions to a second main objective of the HFSF, and provides that such divestment must take place within a specific horizon, in a definitive and efficient manner and in full, and in principle within the lifetime of the HFSF. The Executive Board of the HFSF (the ‘HFSF Board’) is responsible for this divestment, and the HFSF Chief Executive Officer is required to inform the Greek Ministry of Finance on a quarterly basis on the divestment’s progress. 1.1.2 The draft law introduces an obligation for the HFSF Board to draft a divestment strategy that must contain, inter alia, both the general schedule for divesting as well as specific milestones for each credit institution in which the HFSF participates, and to set out the necessary tender/bidding procedures through which the divestments will take place, the conditions for participating in these procedures and the possible pricing methodology for the divestment of HFSF-held shares and/or instruments.

1.1.3 The draft law provides that the HFSF Board may consult, on matters relating to the HFSF’s divestment strategy, with such institutional bodies as it deems appropriate, including credit institutions, ensuring the confidentiality of information. To take the decision to adopt the divestment strategy, the HFSF Board must commission an independent financial advisor of internationally recognised standing and experience in similar matters to prepare a report. The Ministry of Finance must provide its prior consent on the divestment strategy before it is implemented, and, to that end, may consult the Bank of Greece. It must also provide the HFSF, at least on a quarterly basis, with its views and opinion on this strategy and its implementation by the HFSF. The HFSF must on its side inform the Ministry in writing within ten working days of any reservations it may have regarding the Ministry’s views. 1.1.4 The draft law provides that to decide on any disposal of HFSF-held shares and/or instruments in a specific credit institution, the HFSF must obtain a second report from an independent financial advisor of internationally recognised standing and experience in similar transactions (hereinafter the ‘disposal advisor’). For the selection of the disposal advisor the Ministry of Finance must give its opinion to the HFSF on the basis of a list of at least three candidates submitted to it by the HFSF. The report must include among others a proposal for a specific disposal transaction in accordance with the divestment strategy, a description and assessment of the prevailing market conditions, a reasoned proposal for the most appropriate structure of the transaction and a reference timetable for the disposal. The disposal of the HFSF’s holdings in each credit institution is to be carried out in a manner consistent with the HFSF’s objectives. The draft law stipulates that the fact that a price at which HFSF-held shares and/or instruments will be divested that is expected to be lower than the market price or the price at which the HFSF acquired the shares and/or instruments is not a sufficient condition for the divestment strategy to be postponed or not implemented. 1.2 Lifetime and governance of the HFSF 1.2.1 Second, the draft law amends the Law on the HFSF as concerns the lifetime and governance of the HFSF. In this respect, the draft law extends the lifetime of the HFSF from December 2022 to December 2025. The draft law provides that the Ministry of Finance will decide together with the European Financial Stability Facility and the European Stability Mechanism (ESM) on the way in which the capital, assets and liabilities of the HFSF will be transferred upon the end of its lifetime or liquidation. To that end, the draft law also provides that the Ministry of Finance may directly commission a study on the transition process with an independent provider of financial or business and management advice, in accordance with a prior joint decision of the Minister for Finance and the ESM. 1.2.2 The draft law also reforms the governance structure of the HFSF in a number of respects. Most notably it replaces the two-tier governance model, comprising a General Council and Executive Committee, with a single governance body, the HFSF Board, consisting of 6 non-executive and 3 executive members. The tasks assigned to the Executive Committee will be exercised by the HFSF CEO and the tasks of the General Council will henceforth be exercised by the HFSF Board.

1.3 Special powers and rights of the HFSF 1.3.1 Third, the draft law amends the Law on the HFSF as concerns the HFSF’s special powers and rights and clarifies that, under the Law on the HFSF, these powers and rights exist in addition to the standard shareholders’ rights under general corporate and banking law. In this context, the draft law also removes all restrictions on voting rights associated with the shares and/or other instruments held by the HFSF in credit institutions . 1.3.2 The draft law removes the following special rights of the HFSF in credit institutions’ board of directors: the right to ask that the general assembly of shareholders be convened; the right to veto decisions of the credit institution’s board of directors regarding dividend distributions and variable remuneration in case the institution’s non-performing exposure (NPE) ratio is below 10%; the right to veto decisions of the credit institution’s board of directors that might endanger depositors’ interests or more generally the solvency, liquidity or smooth functioning of the credit institution; and the right to approve the credit institution’s Chief Financial Officer. In addition, the draft law provides that restrictions on the fixed remuneration of members of the board of directors and key executives only apply for as long as the NPE ratio of the credit institution in question is above 10%. Bonuses for the same persons are abolished for as long as the EU restructuring plan of the credit institution in question is not concluded and variable remuneration can only be provided in the form of shares, stock options or 4 5 other instruments , for as long as the credit institution is under capital support . 1.3.3 The HFSF’s free access to credit institutions books and records is restricted only to information needed for the purpose of the divestment of the HFSF’s holding in the credit institution. 1.3.4 The draft law removes certain HFSF powers relating to governance aspects of credit institutions, including the power to evaluate the corporate governance arrangements of a credit institution that the HFSF has funded, which also extends to the evaluation of individual members of the board of directors and the board committees of that institution , and the power to develop criteria for the evaluation of the above elements . The draft law limits the minimum suitability criteria determined by the HFSF for a credit institution’s board of directors. On the basis of these amendments, the draft law also removes the HFSF’s power to make specific recommendations for changes in the corporate governance of a credit institution, including the replacement of members of its board of directors, and to escalate to the general assembly of shareholders if needed . 1.3.5 The draft law specifies that the criteria for institutions’ boards of directors established by the HFSF are complementary to the criteria for institutions’ boards of directors under general corporate banking law.

1.3.6 Lastly, the draft law removes from the HFSF‘s tasks the facilitation of credit institutions in managing non-performing loans.

2. General observations

2.1 The ECB welcomes the divestment-related amendments to the Law on the HFSF, which pave the way for further normalisation of the Greek financial sector following the reduction in vulnerabilities and crisis-related legacies in recent years. A stronger commitment to accelerate divestment of HFSFheld shares and/or instruments in credit institutions in a coordinated and transparent manner under a pre-established, market-based framework and process laid down in the divestment strategy will benefit the Greek banking sector. A further reduction of vulnerabilities in the Greek banking sector by addressing remaining weaknesses in credit institutions’ asset quality, capital and profitability will support the divestment strategy. In this respect, the twin financial stability and divestment objectives of the HFSF should be respected. 2.2 The ECB welcomes the proposed simplification and streamlining of the HFSF’s governing bodies, as this will enable the HFSF to more effectively pursue its objectives and facilitate more effective decision-making. At the same time, it is of the utmost importance that the HFSF continues to enjoy its statutory independence, and that it continues to operate in accordance with private economic activity standards . 2.3 The ECB welcomes the proposed removal of certain special rights of the HFSF in credit institutions’ boards of directors and of certain HFSF powers relating to corporate governance that now fall under the mandate of the ECB’s Single Supervisory Mechanism, which did not exist at the time the HFSF was established. These amendments also reflect the fact that most Greek credit institutions falling within the scope of the Law on the HFSF have completed their EU restructuring plans. The draft law is expected to support the transition of Greek credit institutions into ordinary supervised entities and help ensure a level playing field with other European credit institutions. In this context, the HFSF’s special role in Greek credit institutions will be rationalised, bringing the HFSF closer to an ordinary shareholder in accordance with general corporate and banking law.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 11 May 2022.

[signed]

The President of the ECB

Christine LAGARDE