Do the Greeks need Greek banks?

February 21, 2015 · by wciecon · in Finance, International, Monetary policy, Nick Rowe · 22 Comments

Or could they all use foreign banks? Dumb question. I don't know the answer. Are there some laws that make it hard to use foreign banks? Tourists seem to manage OK without opening a foreign bank account. It ought to be easier still if the foreign country uses the same currency. Could the foreign banks install ATMs in Greece without becoming Greek banks? Do you even need to be a bank to operate an ATM? And you don't need to be a bank to lend someone money. Does physical location really matter, especially for money that has no physical form, so the only thing that gets transported is information? How often do we need to sit down face to face with our banker?

22 comments

JKH · February 21, 2015 - 4:33 pm · Reply→

Odd thought experiment.
But I would guess its possible that the Greek government requires taxes be paid at a Greek bank.
Or would require it to defeat your thought experiment from becoming reality.
Giovanni Zibordi · February 21, 2015 - 5:01 pm · Reply→

Greeks moved abroad at least 120-150 billions euros in a country with a 180 bil GDP, so they could operate from abroad in terms of payments, but foreign banks do not lend to small and medium companies. They might do mortgaged though
RI · February 21, 2015 - 5:08 pm · Reply→

Are you asking the same question if you replace the word “banks” with “deposit-taking institutions”?
Also, in this experiment, does the deposit-taking institution hold assets in the country where it accepts deposits (Greece), or does it place its assets outside of that country? I would think that makes a difference.
George J. Georganas · February 21, 2015 - 5:12 pm · Reply→

Well, the 2,7 million pensioners of Greece sometimes need the banks to lend the government some money, so that they (the pensioners) can get their pensions. Even in February 2015, after nearly full five years of “austerity”, more than half the people who got pensioned off in Greece were less that 61 years old.
See page 11 of this report http://www.idika.gr/files/21%CE%B7_%CE%95%CE%9A%CE%98%CE%95%CE%A3%CE%97_%CE%97%CE%9B%CE%99%CE%9F%CE%A3_v3.pdf
Same for the people that get their salaries from the Greek state, such as tax collectors, police, the army, judiciary, the health service employees and most of the teachers.
So, yes, most Greeks need the banks to get their paymnents from the Greek state on time. Those people in Greece who still work for private sector employers and have not yet become unemployed get to receive their salaries quite late, since Greek banks lend in priority to the Greek state and have few funds left to finance private sector employers.
Tim Worstall · February 22, 2015 - 5:09 am · Reply→

Depends upon what your definition of “Greek bank” is. A bank that operates in Greece can be owned by foreigners, no problem with that. But also a bank which operates in Greece has deposit insurance done by the Bank of Greece (as the local rep of the ECB). And that would be regardless of ownership of the bank. The Greek serving arm of a British bank would be under the Bank of Greece, not Bank of England.
So, really, it depends upon what you mean by a greek bank. What’s actually worried about is that if they went bust then it would be the Bank of Greece that would have to bail them out. And as it can’t create money (only the ECB can do that) then it’s terribly constrained as lender of last resort. It’s that aspect of “greek bank” which is the concern, not stock ownership.
Kevin Donoghue · February 22, 2015 - 5:53 am · Reply→

Tim Worstall,
Not so. The Bank of Greece is under no obligation to insure deposits at the Athens branch of Deutsche Bank, for example (not that anyone would want it to). The Athens branch can borrow from the Frankfurt branch and the Bundesbank certainly won’t object to that.
Nick Rowe · February 22, 2015 - 7:07 am · Reply→

RI: “Are you asking the same question if you replace the word “banks” with “deposit-taking institutions”?”
I don’t know. One of my previous dumb questions was what is the difference between a depository and a non-depository financial institution?. and we came to the conclusion that there wasn’t any important difference, and that it’s just a term in US law.
“Also, in this experiment, does the deposit-taking institution hold assets in the country where it accepts deposits (Greece), or does it place its assets outside of that country?”
Couldn’t a Swiss bank accept deposits from people who live in Greece and also lend money to people who live in Greece? (It’s not obvious to me if that’s a Swiss bank or a Greek bank.) Which is Tim Worstall’s question.
Kevin Donoghue · February 22, 2015 - 7:29 am · Reply→

Some answers in this IMF paper:
Subsidiaries or Branches: Does One Size Fit All?

Click to access sdn1104.pdf
JKH · February 22, 2015 - 7:42 am · Reply→

“Couldn’t a Swiss bank accept deposits from people who live in Greece and also lend money to people who live in Greece?”
Yes. That’s standard international banking.
And it’s a Swiss bank. Could be a subsidiary or a foreign branch. But it’s a Swiss bank.
BC · February 22, 2015 - 8:02 am · Reply→

Does a city, village, or neighborhood need its own banks or could its residents just use “foreign” banks, banks located in one of the country’s other towns? If the town wants to have its own banking regulations, then one might argue that the town needs its own banks since some other town’s banks might fall outside its jurisdictional reach. But, that suggests that, to the extent domestic banks are needed, they are “needed” primarily for political reasons, not economic ones.
(Aside: coincidentally, a new Scott Sumner post [http://econlog.econlib.org/archives/2015/02/should_america.html] highlights that, even from a political perspective, the line between a foreign and domestic bank can be blurred.)
Nick Rowe · February 22, 2015 - 10:00 am · Reply→

BC: yes, I think that’s a closely related question. In the olden days we had to actually visit a bank branch to get anything done. But with internet banking, Interac, and ATMs in corner stores, it seems to be different. But I’m less sure about the bank lending side.
All: good comments. I’m not responding to them all, because I don’t have anything useful to add. But we seem to be heading towards the conclusion that the answer is mostly “no”. Which is interesting in its own right, but maybe also of policy-relevance in the Greek case.
Jerry Brown · February 22, 2015 - 12:53 pm · Reply→

I’m no expert and I don’t know what would apply within the E.U., but I would imagine that a U.S. bank would have to rely on the Greek court system to enforce a loan contract in the event of default on a loan made to a Greek citizen who had assets and income only in Greece. I think that might reduce the willingness to extend credit.
W. Peden · February 22, 2015 - 1:29 pm · Reply→

“its possible that the Greek government requires taxes be paid at a Greek bank”
Let’s not get excessively hypothetical.
Nick Rowe · February 22, 2015 - 2:59 pm · Reply→

Jerry: “… I would imagine that a U.S. bank would have to rely on the Greek court system to enforce a loan contract in the event of default on a loan made to a Greek citizen who had assets and income only in Greece. I think that might reduce the willingness to extend credit.”
But that would presumably also be true for a Greek bank.
Nick Rowe · February 22, 2015 - 3:06 pm · Reply→

Suppose the answer to my question is “no”. I think that has two implications:
1. If all the Greek banks go bust, it might not be quite the disaster for the Greek economy that we think it would be. (Especially if most of their deposits had already run away.)
2. Greeks might be more likely to continue using the Euro, whether or not the government wanted them to, and whether or not the government and the banks went bust.
But I’m not sure about any of this. And I wonder if this is what the Greek government is thinking, and just waiting for all the deposits to run away?? Dunno.
JKH · February 22, 2015 - 3:56 pm · Reply→

Peden,
You know for a fact that foreign banks process Greek tax payments?
W. Peden · February 22, 2015 - 3:58 pm · Reply→

JKH,
I know that someone processes money through bank deposits that should be paid in taxes to the Greek government.
J.V. Dubois · February 23, 2015 - 10:31 am · Reply→

The answer is Yes and No. Technically it is OK. You can have banking license anywhere in Europe and offer banking services to other European countries. There are numerous examples of this. However from practical standpoint you at least have to have local bank presence. It is hard for foreign bank to work on legal issues when bank loan fail etc.
But to reiterate it is OK to have banking license in different country and then open subsidiary in other EU country. I can easily see this arangement in Greece. But once you are there for some time and you have greek assets such as houses an actives sides of your balance sheet then there is no difference between you and other greek banks. Except maybe for things like deposit insurance etc. But when push comes to the shovel weird things can happen on that note too (see Iceland and refusal of icelandic bank to pay deposit insurance for foreign customers).
Oliver · February 23, 2015 - 11:41 am · Reply→

herre’s a diagram of the Euro system:
http://1.bp.blogspot.com/-g4gAvawwWIc/UPvOq-T1CDI/AAAAAAAAAMo/WeDDZXOZK7k/s1600/ESCB-1+%2528verschoben%2529.tiff
and what it should look like so that it makes no difference where banks reside within the currency system:
http://2.bp.blogspot.com/-VKqNxN_90J4/UPvRjDt2OpI/AAAAAAAAAM4/tg4FiLhMUUo/s1600/ESCB-2+%28verschoben%29.tiff
In short, cross border transactions are recorded as such and lead to national banks of the member states owing to each other (target 2 balances) instead of being cleared by one central bank as in a proper monetary union. The euro is basically a bunch of local currencies that have the same name and trade 1:1. But the borders still exist.
Oliver · February 23, 2015 - 12:00 pm · Reply→

So if a Greek company or individual banks with a German bank, this is recorded as capital flight and Greece then owes Germany via target 2 (as opposed to just an individual / company owing a bank that happens to be somewhere cold). At least that’s how I understand it.
Bob Smith · February 23, 2015 - 7:30 pm · Reply→

Surely the fact that Greeks have been moving billions of Euros out of Greek Banks (and presumably into Swiss or other foreign insitutions) is suggestive.
But I think the question sort of depends on exactly what role the banks are playing. For most people, banks aren’t so much a financial institution as a service provider – we use banks because they make our life easier. The bank provides the service of giving us money every where we go (through ATMs or interac – or whatever the EU equivalent is – machines). It’s akin to paying someone to follow us around with a bag of cash in case we need it. For that role, we probably do need a Greek bank, since it can minimize transaction costs – El Banco des Islas Caymano probably doesn’t have ATM machines in Athens and no doubt charges hefty service fees for interac transactions. In that role, even the tourists use Greek banks as intermediaries to access their foreign banks.
On the other hand, where the bank is serving a more traditional role as a deposit taking or lending institution, it’s not clear that a “greek” bank is any different from a foreign bank (absent regulatory restrictions and the like). For small loans/deposits (i.e., they amounts that any of us might take or make), again the transaction costs probably favour local banks in practice (although, this is not absolute – note the dominance of Canadian banks elsewhere in the Americas – TD in the US, Scotia in latin and south america).
For loans/deposits that are significant, one is much the same as the other (that’s very clear on the lending side, where international banks and domestic banks often compete for lending in many countries). There the transaction costs associated with using foreign banks are dwarfed by the magnitude of the transactions.
So the question is, are those transactions for which transaction costs favour local banks so significant that the disappearance of Greek banks would cause the local economy to implode? I suspect “yes”, but could be wrong.
Jussi · March 3, 2015 - 8:29 am · Reply→

Why couldn’t Greece use “foreign banks” (foreign meaning banks under the ECB)? Even the treasury can in principle use “foreign bank” for all of its operations.
I wouldn’t be surprised if the treasuries many of the smaller euro states (e.g. in Baltic region) would mainly rely on “foreign banks” in their operations. And some might rely on Swedish bank, given their strong presence there.
@Oliver
“In short, cross border transactions are recorded as such and lead to national banks of the member states owing to each other (target 2 balances) instead of being cleared by one central bank as in a proper monetary union. The euro is basically a bunch of local currencies that have the same name and trade 1:1. But the borders still exist.”
But if the ECB and national banks are thought to be as a single central bank mechanism, then euro would be a proper monetary union. So the borders are only due target2 book keeping.