Regulatory framework and deposit – investment guarantee fund in Greece

Abstract

Purpose – The purpose of this paper is to examine the current regulatory framework of Greek Deposit and Investment Guarantee Fund, trying to show solutions for strengthening it. Design/methodology/approach – This paper aims to investigate the deposit and investment guarantee fund in Greece by identifying new problems and developing solutions. Findings – The main finding is that the deposit and investment guarantee fund contributes to the stability of the Greek banking sector and also offers practical solutions to strengthen it. Greek Deposit and Investment Guarantee Fund has an important feature, which is the speed of a decision about a bank failure resolution (in five working days), but needs immediately strengthening and increasing its funds to cope with the resolution of non-viable banks and undertaking for costs. There should be an appropriate ratio between the size of total assets (especially cash and cash equivalents) of Greek Deposit and Investment Guarantee Fund and the amount of total guaranteed deposits, which is now below 2 per cent. Regulatory framework needs revising and fees must be increased if its funds fall below a certain level of coverage of guaranteed deposits. Also, a guarantee premium, not only a flat rate premium, should be implemented for all banks. An additional risk-adjusted premium varying according to Greek banks’ risks of their portfolios would be better to increase funds of deposit guarantee fund and reduce moral hazard of bank manager by increasing costs. They must ensure an adequate diversification of re-deposits of Greek Deposit and Investment Guarantee Fund funds and must limit and avoid a conflict of interest of its board membership for individuals who are actively involved in Greek commercial banks by implementing framework and rules about it. Also, as a consequence of obeying the regulatory framework, it is necessary to include as board members of Greek Deposit and Investment Guarantee Fund only those banks that are subject to strong prudential supervision and regulation. Practical implications – As a result of research, changes are necessary to immediately be made to cope with current financial crises and problems of Greek banking sector. Originality/value – The originality of this paper is that it is the first description of the Greek Deposit and Investment Guarantee Fund and its results are important for economists, politicians and international community, who evaluate the regulatory framework of Greek Deposit and Investment Guarantee Fund, especially at the current time when the Greek economy and the Greek banking sector are in a very weak fiscal position.