Presentation @ Risk Management Conferece - Athens on 19/6/12. George Georgakopoulos

1. International waves of regulation
The cost for banks and the economy
4th Risk Management & Compliance Forum
George Georgakopoulos
Executive Vice President – Bancpost
President of the BOD – EFG Retail Services
George.georgakopoulos@bancpost.ro
Athens,
June 19th 2012

2. Introduction and Summary
A wide set of international reforms, as well as many nation–specific changes are being introduced, aimed at
improving the stability of the global financial system.
The prevailing regulatory rationale is micro-prudential, attempting to stabilize the financial system through
higher capital & liquidity requirements.
Banks are four years into what will probably be a decade–long phase of adjustment to tougher regulatory
standards.
Tougher regulations might increase capital needs , for Euro area banks only, by 700 bn euro, and long–term
debt issuance by 300 bn. by 2015.
These funding demands will likely lead to an increase in bank lending rates of about 364bps over the next
five years.
Much of the adjustment to date has occurred through de–leveraging, which has been an impediment for the
global economy.
Higher lending rates will likely reduce the level of real GDP of the Euro area by about 3% up to 2015, or by
about 0.7% per year.
CEE economies will be affected more, since they rely heavily on bank financing
This would lead to about 2.8 million fewer jobs being created over the next four years.
Alternatives to pro-cyclical regulation such as macro-prudential measures, or mitigators such as direct
support from governments and central banks to ensure lower cost of funding for banks, and, therefore,
more lending, might well come to the forefront of the public policy debate in the near future.
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3. Key Areas of Regulatory Changes
Regulatory Changes
Internationally agreed-on measures Nation-specific measures
Capital related measures Liquidity related measures e.g. Romania:
• additional capital and liquidity rules
• consumer protection
• Internationally capital agreed-on measures may include the following: • restriction on credit expansion
higher core ratios
re-definition of capital
changes in risk-weighting
capital surcharges
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4. The Regulatory Agenda Facing Financial Firms
CAPITAL Liquidity
New minimum capital levels Liquidity coverage ratio
Capital conservation buffer Net stable funding ratio
Counter-cyclical buffer Liquid asset definition
Revised definition of capital Role of central bank
Trading book capital Local restrictions
Counterparty credit risk charge Off-balance sheet commitments
Contingent capital Treatment of financial institutions
Leverage ratio Money market fund regulation
Source: IIF “The Cumulative Impact on the Global Economy of Changes in the Financial Regulatory Framework” _ Sept 2011 4

5. Basel III Minimum Capital Ratios and Phase-in Plans
2011 2012 2013 2014 2015 2016 2017 2018 2019
1. Minimum Common Equity
2% 2% 3.50% 4% 4.50% 4.50% 4.50% 4.50% 4.50%
Capital Ratio
2. Capital Conservation Buffer 0.625% 1.25% 1.875% 2.5%
3. Total (1+2) 2% 2% 3.5% 4% 4.5% 5.125% 5.75% 6.375% 7%
4. Phase-in of deductions from core Tier
20% 40% 60% 80% 100% 100%
1equity due to capital redefinitions
5. Phase-out of instruments that non longer
10% 20% 30% 40% 50% 60% 70%
qualify as non-core Tier 1 or Tier 2 capital
Memo:
Minimum Tier 1 Capital 4% 4% 4.5% 5.5% 6% 6% 6% 6% 6%
Minimum Total Capital 8% 8% 8% 8% 8% 8% 8% 8% 8%
Source: BCBS 5

6. What Changes Occurred since the Crisis Started? (I)
Many financial institutions across the world have been either liquidated or merged; whole sectors
of the financial industry have disappeared or been reformed; market mechanisms and transparency
have improved; and, perhaps most importantly, Industry behavior has been radically changed by the
experiences of 2007 – 2008.
Among the key changes already registered have been significant efforts by banks to boost capital
and liquidity ratios (like Basel II)
The crisis has made bank managers themselves far more conservative in their behavior & in the
desired structure of their balance sheets. “Fortress balance sheets” have become desirable and
attractive to regulators, bank managements and investors
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7. What Changes Occurred since the Crisis Started? (II)
Supervisors have begun to enforce higher capital and liquidity ratios well ahead of the
implementation of globally agreed-on norms. In some cases, this reflects the introduction of new, local
specific norms (in Switzerland, where banks were required to raise capital and liquidity ratios in 2008).
In the United States, the stress test of early 2009 (otherwise known as the Supervisory Capital
Assessment Program, or SCAP ) showed that under an adverse scenario, 10 of the 19 SCAP banks
would need to raise a total of $75 billion in capital in order to have the capital buffers that were
targeted under the SCAP.
In Europe, the publication of the results of the 2011 European Banking Authority (EBA ) stress
test exercise revealed that several banks had made substantial efforts to improve their capital position
in the first half of the year, largely in anticipation of the exercise itself.
Many banks are adjusting as rapidly as possible to new international norms for both capital and
liquidity well ahead of their formal timetable introduction.
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8. How Regulatory Reforms Impact the Economy?
Globally Coordinated Reforms Distance for banks to adjust National reforms
Time for implementation
Economy’s dependence on
banks for credit intermediation
Other factors shaping banking
health
Impact on economy
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9. Costs of Additional Equity and Debt Funding will Define the Impact on the Economy
Perceived riskiness of
banking sector All 3 are likely to
work negatively for
Cost of Bank Near term
Equity Capital supply
SE Europe in the
Ability of banks to
near term
deliver on investors’
expectations
Increased demand for bank Perceived riskiness
debt will increase the
Cost of Long-
spreads, however the of the region might
Term Bank stronger capital ratios will
Debt reduce the risk of bank well disadvantage
bond-holders
SEE banks
The Bank of England already announced on June 14th that it is looking to give to banks cheap
funding for several years as to ensure bank lending in periods of extended uncertainty.
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10. The Price to Book Ratios though Indicate Low Appetite for Equity Investment in Banks
5.0
4.0
3.0
2.0
1.0
0.0
08
09
10
11
8
08
8
9
09
9
0
10
0
1
11
1
2
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-0
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p-
p-
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p-
n-
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n-
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ec
ec
ec
ec
ar
ar
ar
ar
ar
Ju
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Ju
Ju
Se
Se
Se
Se
M
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M
D
D
D
D
RZB Unicredit Erste EFG Eurobank Alpha Bank NBG
Price to book = Market Capitalization / Tangible Book
Tangible Book = Total Equity – Intangibles - Goodwill
Source: Bancpost internal estimates; Reuters
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11. Regulatory Reforms will Have an Impact on the Real Economy
Impact on banks Lower credit supply
Higher bank
Regulatory lending rates Lower aggregate
Change demand
Higher private sector
borrowing costs
Impact on non-bank Higher non-bank
credit intermediation lending rates
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12. Estimated Costs for Economies & Banks
Higher lending rates will reduce the level of real GDP by about 3% up to 2015, or by about 0.7%/ year for
the Euro area. This would lead to about 2.8 million fewer jobs being created over the next five years.
Change in real GDP & employment
By 2015, banks are projected to need
-0.6%
to raise about 1.8 trillion USD.
The impact of reform is to reduce
avg. GDP (of the 5 regions) by 0.7 pp /
-3.0% year for the next 5 years. This leads to
a lower GDP by 3 pp than where it
would otherwise be.
In 2015, employment impact implies
that governments would make a dent
for the 17 mil shortfall registered
between Q3 ’08 & Q1 ’10.
-2,825
Sources: International sources and IIF report _ Sept 2011 12

13. What About the Impact of the international Regulation Reform
on Eastern Europe?
The impact on the GDP of the CEE between 2011 and 2015 is likely to be higher than the 3% of the
Euro area because of:
1. Higher cost of equity capital, driven by higher credit risks in the CEE
2. Higher cost of debt funding, driven by higher CDS rates
3. The reliance on banks as the main financing option in the region
4. Local measures in the region which further accentuate slow-down in lending (e.g. regulatory
ceilings of indebtedness, regulation on tenors, etc)
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14. Benefits of Regulatory Reform
Higher capital and liquidity requirements will lead to a greater degree of shock absorbency. This
will make the banking system more resilient to costly future financial crisis.
One can consider current regulatory changes as an insurance premium in view of future crisis.
Higher capital ratios provide insurance to banks against business decisions going wrong, but also
against issues caused by economic volatility.
The higher capital and liquidity ratios might convince investors that it is attractive to invest in
banks across the economic cycle since their capital is safer
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15. Are There Alternatives to Micro-Prudential Regulation?
I expect alternative approaches to the current path of regulatory reform to get stronger support in the
future, and specifically measures that do not slow-down lending in the recession or post crisis:
• Time varying capital requirements
• Higher quality capital
• Corrective action targeted at Euro amounts – not capital ratios
• Regulation of debt maturity
• Regulation of the shadow banking system (ABS funded short term)
Source: Hanson, Kahyap and J Stein, A macro-prudential approach to Financial Regulation 15

16. Conclusions
Following the financial crisis, regulators have introduced requirements for additional capital and
liquidity – an adjustment process that will last for several more years
The key argument in favor is that such regulation is that it will protect the economy in future
crises
However, it is equally expected that such regulation will impact GDP and employment in the
short & medium term, due to the increase in lending rates and contraction of demand
The negative impact is likely to be higher in Eastern Europe, since the costs of equity and debt
capital will be higher
Micro-prudential regulations have been criticized as untimely. Alternative macro-prudential
regulations are likely to get more support in the future
Central banks and governments are likely to consider the plans of the Bank of England to provide
cheap long term funding to banks so that they do extend lending in uncertain times
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