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Alternative Financial Regimes
and Development Banks in Greece
1963-2002: What Have We Learned?
34
Articles
Economic Alternatives, Issue 1, 2017
Konstantinos I. Loizos*
Summary
The recent global financial crisis spurred
a renewed interest in development banking
because of the countercyclical role many
of these banks assumed during the crisis.
However, there is no agreement in the
literature concerning the nature and efficiency
of development banks. This paper focuses
on their role as agents of institutional change
and the concomitant need for their internal
transformation as institutional development
goes on. The question posed is how
development banks’ internal transformation
from the traditional development banking
model to a modern investment banking
model is affected by the political decision on
the prevailing financial regime. The paper
addresses this question by examining the
relationship between development banks
and alternative financial regimes in Greece
during the period 1963-2002. Useful insights
concerning the role of government policy in
development banking are drawn.
Key words: Development Banks, Financial
Regimes, Institutional Change, Greek Economy
JEL Classification: B52, G21, N24
1. Introduction
One of the consequences of the
recent global financial crisis is a
renewed interest in development banking,
not least because of the countercyclical
role many national development banks
assumed as financial turbulence unfolded
(Lazzarini, Musacchio, Bandeira-de-Mello
and Marcon, 2015; De Luna-Martínez and
Vicente, 2012; Gutierrez, Rudolph, Homa
and Blanco Beneit, 2011; Smallridge and
De Olloqui, 2011). Yet, development banking
seems to be caught between a rock and
a hard place as far as its efficiency and
functionality for economic and financial
development is concerned. Fry (1995:362-
365) stresses development banks’ inability
to mobilize domestic savings and their
poor performance in allocating capital
effectively to productive investments. On
the contrary, Studart (1995:75) and Chang
and Grabel (2005) consider development
banks as "compensating mechanisms"
to overcome the problem of thin capital
markets, according to the idea that a
financial system is "functional" as long as
it accommodates the financing needs of
economic development.
Although there is still no generally
accepted definition of development
banks (Yeyati, Micco & Panizza, 2004)
development banking, and its distinctive
characteristics with respect to commercial
banking, dates back to 19th century when
commercial banks were reluctant to grant
long-term loans because of the higher risk
Alternative Financial Regimes and
Development Banks in Greece 1963-2002:
What Have We Learned?
* National and Kapodistrian University of Athens, Department of Economics, email: komilos@hol.gr
Economic Alternatives, 2017, Issue 1, pp. 34-50
35
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of this kind of financing and the lack of
expertise to assess this risk (Armendáriz
de Aghion, 1999). Hence, banks designed
to promote economic development such
as the Crédit Mobilier in France (Cameron,
1953) or the German Universal Banks
(Gerschenkron, 1962:10-11) became the
prototypes of the proliferation of development
banks in the 20th century. Moreover, the
Crédit Mobilier played a special role in
promoting financial development, along
with industrial development, by transmitting
the organizational skills and knowledge
it acquired to other European banks
(Armendáriz de Aghion, 1999). However,
commercial banks did not assume a special
role for economic and financial development
measured in terms of socioeconomic
returns, as was the case for development
banks (Bruck, 1998).
Besides their long-term loans,
development banks acted as agents of
institutional and financial development by
offering a variety of services to their clients
such as leasing, factoring and securitization
services along with their training programs
and advisory services. They aimed, as well,
at the transformation of existing conditions
in an economy through the development
of skills and the acquisition of habits and
attitudes that would change the way of
thinking of the local business community.
(De Luna-Martínez and Vicente, 2012;
Diamond, 1982c). In addition, development
banks were meant to transform themselves
and adapt to the changing environment by
diversifying their activity towards "universal
banking" as financial development went on
(Bruck, 1998; Diamond, 1982b). Hence, there
was a need for a continuing reevaluation
and reorientation of banks’ goals based on
their growing experience and the evolving
national policy objectives (Diamond, 1982a).
We can think of incremental institutional
change as the offspring of interaction
between the institutional framework of a
society on the one hand, and the purposeful
action of agents given their perceptions and
beliefs, or alternatively, of "organizations as
behavioral entities in their own right" on the
other hand (North, 2005: viii, 26, 59; North,
1990:73). In this theoretical framework,
development banks can be conceived as
purposeful entities/organizations whose
dynamic nature and transformation defines
them as reflections of the financial system’s
development between two financial regimes:
repression and liberalization.
However, government policy is crucial in
this context since it is the one that decides
the long-run viability of financial institutions
(North and Shirley, 2008) by setting up
the matrix of motives and restrictions in
which development banks operate. Hence,
the question posed by this paper: How is
development banks’ internal transformation,
from the traditional development banking
model to a modern investment banking
model, affected by the political decision on
the prevailing financial regime? The paper
studies the historical example of Greek
development banks during the period 1963
– 2002. It is found that changing government
policy concerning the preferred financial
regime became the ultimate constraint and
risk factor which these banks faced. As the
financial regime changed from financial
repression to financial liberalization,
government ownership of a development
bank was negatively correlated to its
financial viability whilst the closer the control
of the government on a development bank
the less successful was its transformation.
The argument is presented in the
remaining sections of the paper. Section
2 describes the phases of economic
and institutional development in the post-
war Greek economy. In the context of
this periodisation, Section 3 discerns the
different patterns of internal transformation
of development banks and its success or
failure. Finally, Section 4 concludes.
Alternative Financial Regimes
and Development Banks in Greece
1963-2002: What Have We Learned?
36
Articles
Economic Alternatives, Issue 1, 2017
2. Alternative Financial Regimes
in the post-War Greek Economy
During the post-war period the Greek
economy was characterized by a "great
cycle" (Drakatos, 1997) which can be
decomposed as follows:
i) A phase of "reconstruction" (1945-
1952), characterized by a growing demand for
economic stabilization and reorganization of
production. In 1946, a Monetary Committee
was established with the mandate to control
the money issue. The Monetary Committee
succeeded in curbing inflation and abating
monetary instability by 1952.
ii) A "preparation" phase (1953-1956)
characterized mainly by the devaluation of
1953, in order to support competitiveness
along with a rise in domestic savings in the
form of bank deposits as a consequence
of the established confidence in currency.
Incentives to boost foreign direct investment
(LD 2687/1953) and a new incomes tax law
(LD 3223/1955) were attempts to modernize
the domestic institutional structure.
iii) A remarkable period of development
1957-1972, with emphasis on industrial
development and especially in sectors such
as aluminum, metal industry, shipyards,
petrochemicals and cement. During this
period, domestic firms became familiar with
foreign know-how especially in management
techniques, while macroeconomic stability
was entrenched in the context of international
monetary stability. In1961, Greece signed a
historic association agreement with the EEC.
An important breakthrough for institutional
development was the establishment of three
development banks: the Hellenic Bank of
Industrial Development (ETBA), the National
Investment Bank of Industrial Development
(ETEBA) and the Investment Bank (TE).
iv) The ensuing period 1973-1980 marked
a turning point, with two international oil
crises in 1973 and 1979 and the meltdown
of the Bretton Woods regime. The return of
inflation that reached levels ranging from
15.5% in 1973 to 24.9% in 1980, along with
growing uncertainty and instability, hurt
entrepreneurial activity, investment demand
and hence, GDP growth. Despite all these,
Greece entered the European Economic
Community in 1981 as its 10th member.
v) Eventually, the country passed through a
phase of recession (1981-1995) characterized
by great macroeconomic imbalances and
deindustrialization, especially during the
stagflation period 1981-1985, in spite of
a short-lived stabilization programme in
1986-87. The time span 1991-1994 was a
period of transition from high to moderate
inflation rates which paved the way for
further disinflation and correction of
macroeconomic imbalances until Greece’s
accession to the Eurozone on the 1/1/2001
(Garganas and Tavlas, 2001).
The choice over the financial regime as
the economy was passing through this "great
cycle" was dictated by the anxiety of the
Greek polity to change the institutional matrix
towards the western political and economic
paradigm. Pagoulatos (2003:39) states that
government’s developmental initiatives in the
1950s and 1960s were strongly influenced
by the need to defend the Western political
and economic structures in the context
of the cold war. The model championed
by the Governor of the Bank of Greece,
Xenophon Zolotas, for the period 1955 –
1967 was based on the idea of mixing price
stability and bank-financed industrialization
with the helping hand of the government.
Monetary stability was important as Greek
economic development depended on an
export oriented growth rather than increased
domestic consumption (Psalidopoulos,
1990:52-53). At the centre of a financial
repression regime was a credit policy used
at the same time for developmental reasons
and for maintaining stable prices by means
of quantitative controls on credit and of
special bank reserve requirements. Credit
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rationing was used as a means to limit
credit expansion whenever price stability
was threatened by excessive liquidity
(Pagoulatos, 2003:32-33). The Monetary
Committee decided on the economic
sectors that should be granted preferential
credit according to prescribed percentages,
the rates of interest charged, the terms
of loans, the procedures that should be
followed by banks and the collateral that
should be demanded depending on the type
of loan (Halikias, 1978:27-29).
However, the dominant feature of the
Greek financial structure of that era was
a very thin capital market along with an
oligopolistic organization of the banking
system, predominated by two major
commercial banks, the National Bank of
Greece and the Commercial Bank of Greece
(Psilos, 1964:186; Kostis, 1997:91). Behind
the reluctance of large family-owned firms
to go public or the inability of small firms to
access the capital market, lay institutional
shortfalls such as the inadequacies of
Greek corporate law to protect shareholders’
interests and the lack of competition in the
banking industry, all of which resulted in
the paradox of excess supply of savings
coupled with high cost of capital (Psilos,
1964:246-251). These features that were
related to capital market underdevelopment
underpinned the justification for state
intervention, to channel these funds to uses
conducive to economic development through
a complex system of rules and controls.
After the oil crises of the early 1970s
and the ensuing international economic
turbulence and monetary instability, the
financial repression regime could no longer
guarantee the price stability-economic
development policy mix of the 1960s.
Although this new inflationary monetary
regime prevailed until 1990 (Garganas and
Tavlas, 2001), ideas and policies changed
gradually from 1982 and especially from
1987 onwards, when financial liberalization
proper came into effect. The two major
studies of the Greek banking system
prepared by the Harissopoulos Committee
(1979) and the Karatzas Committee
(1987) indicate the policy change under
the pressure of developments such as
the accession of Greece to the European
Community in 1981 and the 1992 milestone
of European Market integration. Financial
deregulation was concluded in 1995
while an important institutional resolution
was the declaration of the Central Bank
independence in December 1997, with the
specific mandate to pursue price stability
(Garganas and Tavlas, 2001). Social
groups’ (lobby) pressures played a minor
role in this change of government policy
while the contribution of organizations such
as the Bank of Greece was crucial. The
Greek state itself was transformed from a
"developmental state" into a "stabilization
state" in the sense of prioritizing
macroeconomic stability over development
(Pagoulatos, 2003:160, 203-205).
Based on this historical account of the
economic and institutional developments
in the post-war Greek economy, this paper
proposes the division of the time period from
1962 to 2002 in three sub-periods. According
to Table 1 below, the first sub-period (1962-
1973) extends over the years of high growth
of the Greek economy until the early 1970s
and includes a host of initiatives towards
both the industrialization of the economy
and its financial development. However, the
prevailing financial regime during this sub-
period was that of financial repression. The
second sub-period (1974-1986), which is
still characterized by financial repression, is
a period of crisis and stagflation and spans
from the first oil crisis till the mid-1980s. In
this period, development banks were called
on to uphold the old industrialization model
by assuming the responsibility of rescuing
and reorganizing unsuccessful firms. Finally,
the last sub-period (1987-2002) was a
Alternative Financial Regimes
and Development Banks in Greece
1963-2002: What Have We Learned?
38
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Economic Alternatives, Issue 1, 2017
Time Period 1962 – 1973 1974 – 1986 1987 – 2002
Economic development High growth rates,
macroeconomic stability Crisis, stagflation Gradual stabilization,
disinflation
Institutional framework Financial repression Financial repression Financial deregulation
Table 1. Periodisation of economic and institutional development in Greece 1962-2002
Source: Author’s categorization
Fig. 1: Greek GDP (Constant 1982 Prices)
0.00
1000.00
2000.00
3000.00
4000.00
5000.00
6000.00
Real GDP
Fig. 1. Greek GDP (Constant 1982 Prices)
Source: Author’s Calculations and Ministry of National Economy (2001, 2002)
period of financial liberalization, gradual
stabilization and disinflation in which
development banks had to assume the
new task of reorganizing themselves in a
changing financial environment.
The above periodisation can be justified
by looking at the structural breaks in the
evolution of real GDP data as depicted in
Figure 1. There is an evident fall in economic
activity in 1974 though real GDP seems to
keep rising after this episode until 1979, the
second oil crisis. Then a fluctuation follows
until 1987 when a new rising trend sets out.
However, if we look at real GDP growth
rates the distinction between the three
proposed sub-periods becomes clearer.
As Figure 2 indicates, fluctuation of GDP
growth rates in the region of positive values
is characteristic for the period before
1974. This is surely not the case for the
subsequent period at least until the late
1980s. Although, there are some values in
the negative territory in the early 1990s as
well, indicating a fall in growth rates, this
decline reverses quickly and a clear pattern
of positive and rising growth rates emerges.
A clear distinct pattern in terms of average
growth rates among the three sub-periods
is corroborated by the summary statistics
depicted in Table 2. The period up to 1973 is
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Fig. 2. Real GDP Growth Rate
Source: Author’s Calculations and Ministry of National Economy (2001, 2002)
Fig. 2: Real GDP Growth Rate
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
Real GDP Growth Rate
clearly the high-growth period of the post-war
Greek economy. The second period 1974-
1986 is characterized by both a sharp decline
in average growth and a much larger variability
around this mean value. Finally, the last period
1987-2001 seems to depict a stabilization of
the economy around an average growth rate
which is higher than the crisis years but much
lower than the 1965-1973 period. Besides, this
last sub-period coincides with the change in
the financial regime from financial repression
to financial liberalization.
Table 2: Real GDP Growth Rate: Summary Statistics
1965- 1973 1974-1986 1987-2001
Mean 9.64 1. 7 7 2.55
Median 9.80 4.00 3.30
Std. Dev. 2.53 5.64 2.71
Min 6.00 -9.70 -2.80
Max 13.20 9.60 7.20
Source: Author’s Calculations and Ministry of National
Economy (2001, 2002)
The above periodisation in economic and
institutional development implies the role of
development banks as agents of incremental
change in the sense of North (1990) in the
Greek economy, i.e. of a blend of deliberate
(formal) and evolutionary (informal) rules
changes (Kingston and Caballero, 2009).
However, it is not clear how government
policy and the prevailing financial regime
affected development banks’ business model.
This interaction between government policies
and development banks’ business model is
analyzed in the next section in the context
of the three-period classification of Greek
economic and institutional development.
3. Development Banks and Financial
Regimes in Greece 1963-2002:
Patterns of Institutional Transformation
The three Greek Development Banks,
ETBA, ETEBA and TE, which were
established during the period 1962-64
Alternative Financial Regimes
and Development Banks in Greece
1963-2002: What Have We Learned?
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Economic Alternatives, Issue 1, 2017
1 Because of a new set of accounting standards introduced that year, data on long-term loans is not available
beyond 1991.
had as major objectives the facilitation of
industrial development, the appraisal and
support of investment and the development
of the capital market (Xanthakis, 1995:177-
178). During their operation, development
banks extended on average 30-40%
of total long term loans offered by the
banking system to Greek firms (Karatzas
Committee, 1987:60). The state-owned
ETBA was the dominant development bank
of the country as its long-term financing
ranged by some estimates between 64-70%
(Xanthakis, 1995: 179) of the total lending
extended by development banks. On the
other hand, ETBA disregarded more often
than not the pure financial return of projects
sponsored by the government placing more
emphasis on their socioeconomic returns
(Xanthakis, 1995:179), perhaps because
its management was more vulnerable than
the other two banks to political pressures
(Halikias, 1978: 246-247).
The change of financial regime during
the 1980s reflected the significant role
of development banking in institutional
and financial development. Indeed, all
three development banks contributed in
the development of the capital market
by underwriting securities, offering their
own portfolio of shares and their own
securities for trading, establishing holding
companies and mutual funds and catering
for fund management and advising services
in mergers and takeovers (Xanthakis,
1995:179-180; Karatzas Committee,
1987:60). Business know-how definitely
improved after a growing number of
firms benefited from development banks’
services. These banks helped in business
development and management techniques
through their participation in boards of
directors of specific companies and
through their consulting services. They also
introduced up-to-date methods of project
appraisal and conducted numerous studies
on the development possibilities of various
sectors of the Greek economy (Karatzas
Committee, 1987:60).
Initiatives for economic development
and institutional change left their footprint
in banks’ balance sheets. The changing
composition of their portfolios in loans
and securities was an indicator of the
changing nature of development banks, as
the financial regime was changing, towards
a business model akin to merchant and
investment banking. However, the success
of this transformation was greatly affected by
their ability to survive the "crisis years" and
to respond effectively to the requirements of
the subsequent liberalization period.
Inspecting, from Figure 3 and Table 3,
the evolution of loans1 extended, it appears
that ETEBA tried to support its clients during
the oil crisis years of the 1970s by keeping
lending high. However, the falling pattern
during the 1980s might be the result of: i)
ETEBA’s attempt to shun lending of failed
firms during the 1980s and ii) financial
deregulation by the mid-1980s onwards
which opened new and more profitable
opportunities for the bank’s operation. Indeed,
while long term loans fell consistently from
the early 1980s through 1991, placements
in securities exhibited a rising trend at least
as of 1986. Hence, it seems that there was
substitution of indirect financing of industry
through share or bond holdings for direct
long-term lending. Furthermore, as the
capital market grew substantially during
the 1990s, ETEBA increased this activity in
unprecedented levels – a rise of 153.47%
during 1997-2001. The above is evidence of
the gradual transformation of ETEBA from
a traditional development bank to a modern
merchant bank.
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0.00
5000.00
10000.00
15000.00
20000.00
25000.00
30000.00
Long and Medium Term Loans
Total Investments in Securities
Fig. 3. ETEBA: Loans and Placements in Securities (Constant 1982 million Drs)
Source: ETEBA Annual Reports and author’s calculations
Mean Median Standard
deviation Min Max
Long-term Loans
1964-1974 8,330.50 5,297.00 8,059.25 53.33 19,817.21
1975-1986 20,916.90 21,978.78 2,668.97 14,914.18 23,314.10
1987-1991 13,130.60 13,741.11 1,640.42 10,631.31 14,494.39
Placements
in Securities
1964-1974 1,808.71 1,207.35 1,353.20 245.07 4,126.91
1975-1986 4,318.20 4,528.59 505.75 3,507.89 4,831.09
1987-2001 9,809.95 6,451.19 6,603.57 4,673.99 24,978.58
Net Profits
1964-1974 145.84 89.94 127.57 16.58 387.88
1975-1986 521.86 485.83 177.77 250.83 874.36
1987-2001 946.54 811.53 665.52 241.79 2,569.03
Table 3. National Investment Bank of Industrial Development (ETEBA) Summary statistics in constant
1982 million Drs.2
Source: ETEBA Annual Reports and author’s calculations
The change in ETEBA’s business
model, was facilitated by the 554/3/1995
Resolution of the Bank of Greece which
permitted ETEBA to accept all kinds of
deposits, extend credit for working capital
to all types of enterprises and raise funds
on the interbank market. Besides, ETEBA
increased its activity in consulting, mergers/
acquisitions and portfolio management.
This process of internal transformation of
2 Summary statistics have been calculated with EViews ver. 3.1. quantitative micro software.
Alternative Financial Regimes
and Development Banks in Greece
1963-2002: What Have We Learned?
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Economic Alternatives, Issue 1, 2017
3 The gaps in Figures 4 and 7 for TE are due to the lack of data for 1975 and 1993-1995.
0.00
2000.00
4000.00
6000.00
8000.00
10000.00
12000.00
14000.00
Long and Medium Term Loans Total Investments in Securities
Fig. 4. TE: Loans and Placements in Securities (Constant 1982 million Drs)
Source: TE Annual Reports and author’s calculations
Mean Median Standard
deviation Min Max
Long-term Loans
1963-1974 3,694.63 2,069.25 3,577.98 73.36 10,417.57
1976-1986 10,202.45 10,016.26 1,697.89 7,622.95 12,777.85
1987-1992 5,274.69 5,524.75 1,816.78 2,607.66 7,273.80
Placements
in Securities
1963-1974 632.34 737.06 332.42 0.00 1,047.43
1976-1986 1,227.72 1,235.91 421.08 632.31 1,971.66
1987-1997 564.84 453.04 239.22 339.10 915.77
Net Profits
1963-1974 67.63 50.10 64.35 -23.22 201.59
1976-1986 9.20 20.45 74.47 -194.09 98.03
1987-1997 -13.52 -47.08 264.52 -295.58 522.15
Table 4. Investment Bank (TE) Summary statistics in constant 1982 million Drs.
Source: TE Annual Reports and author’s calculations
the bank lasted until its absorption by the
National Bank of Greece at the end of 2002
(ETEBA Annual Reports, various years).
This is not the case for TE as Figure 4
and Table 4 indicate3. The adverse economic
conjuncture during the 1970s and 1980s is
the main cause for a steady fall in long-term
lending from 1977 onwards, whilst securities’
holdings also dwindled as of 1979. Hence,
no clear substitution between the two kinds
of assets can safely be established. It
seems that TE could not follow the example
of ETEBA in exploiting the new opportunities
of the financial market deregulation during
the 1990s. Yet, TE, despite its enduring
financial problems as of the mid-1980s,
did not abandon attempts to modernize,
reorganize and extend its operation to more
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0.00
20000.00
40000.00
60000.00
80000.00
100000.00
120000.00
Long and Medium Term Loans Total Investments in Securities
Fig. 5. ETBA: Loans and Placements in Securities (Constant 1982 million Drs)
Source: ETBA Annual Reports and author’s calculations
profitable activities. Hence, it acted as a
manager in syndicated loans, underwriter
in major firms’ share floating on the Athens
Stock Exchange and consultant in Greek
state bond issues. Despite these efforts its
investment banking activity proved anaemic
and the bank ceased its regular operation in
the mid-1990s (TE Annual Reports, various
years; Xanthakis, 1995:195).
The fact that ETBA was a state-owned
bank justifies the pattern depicted in Figure
5 which differs from the one observed
Table 5. Hellenic Bank of Industrial Development (ETBA) Summary statistics in constant 1982 million Drs.
Source: ETBA Annual Reports and author’s calculations.
Mean Median Standard
deviation Min Max
Long-term Loans
1965-1974 50,059.66 47,200.85 19,806.01 28,359.68 76,534.98
1975-1986 65,719.35 66,690.55 3,848.37 58,839.77 71,325.38
1987-1993 96,553.49 101,178.70 11,450.15 75,257.23 104,931.40
Placements in
Securities
1965-1974 13,662.50 12,672.06 2,132.58 12,328.06 18,939.26
1975-1986 16,198.30 16,229.15 2,957.96 11,700.81 20,766.73
1987-2002 36,197.08 27,892.42 21,157.23 14,419.74 80,227.56
Net Profits
1967-1974 534.36 427.00 520.50 0.00 1,330.91
1975-1986 322.72 168.22 587.78 15.25 2,168.75
1987-2002 -5,615.87 -3,711.68 7,819.66 -21,299.90 4,340.59
Alternative Financial Regimes
and Development Banks in Greece
1963-2002: What Have We Learned?
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Economic Alternatives, Issue 1, 2017
in ETEBA and TE. Both placements in
securities and long term loans exhibited
a rising trend until the early 1990s. Long-
term financing rose until 1973, fell during
the period 1974 – 1977 only to rise again
from 1978 onwards, initially smoothly (1978
– 1986) and then more sharply (1987 –
1992). ETBA followed a policy of persistent
support of Greek firms during the turbulent
decades of falling growth in the 1970s and
1980s. On the other hand, holdings of
securities fluctuated widely, after reaching a
peak in 1995, while the lack of data does
not permit us to establish any trend for long
and medium term loans for the same period.
In any case, financial liberalization
affected the bank’s operation as the sizable
fluctuation of securities’ holdings during the
1990s and early 2000s reveals. Besides,
ETBA responded to the new challenges
of the deregulation era by establishing the
ETBA Leasing SA and upgrading the role
of Hellenic Investment Company SA as
of 1988. ETBA Insurance Brokers SA was
added to the ETBA Group in 1991while the
bank became more active in consulting
and underwriting. Finally, in 1994, ETBA
participated in ETBA-Natwest Mutual Fund
Management and in DANUBE Fund (Venture
Capital). Eventually, by the end of 2001, the
bank had been transformed into a universal
bank with separate branches in corporate
banking, retail banking, investment banking
and treasury services. In 2002 the bank
was absorbed by the Piraeus Bank (ETBA
Annual Reports, various years).
The reshaping of development banks
as financial organizations in parallel with
the changing financial regime is also
confirmed by the increased variability of
securities’ holdings during the deregulation
era. Standard deviations, as depicted in the
reported summary statistics, rise between
the periods 1975 – 1986 and 1987 – 2002
by about 1,206% for ETEBA (Table 3),
615% for ETBA (Table 5) and fall by 43%
only for TE (Table 4). This variability depicts
the instability of this source of income as
opposed to the previous financial repression
period. Indeed, during 1987 – 2002 holdings
of portfolios of securities were related
to active trading on the market to exploit
opportunities for capital gains more so than
was the case in the previous periods where
securities were mainly held as a form of
financing, supplementary to that of long-
term loans.
However, development banks’ profitability
and solvency during this process of
transformation was greatly affected by
government policy. Their financial position
deteriorated especially after 1983 due
to losses from loans extended to failed
enterprises in the 1980s and the high cost
of their funding as the government cut off
its interest rate subsidization of banks’ bond
issues (Xanthakis, 1995:180). Bond rate
subsidization was phased out as of 1988
and was abolished completely in 1991. In
addition, banks’ bond issues were taxed – as
opposed to government’s securities – adding
up to disincentives for investors to hold
these bonds in their portfolios (TE Annual
Report, 1988 and ETBA Annual Report,
1990). We should note that in the mid-1980s
bond issues constituted 64% of financing
sources for ETBA, 69% for ETEBA and 42%
for TE (Karatzas Committee, 1987:59). This
fact points to their importance as a funding
source for development banks.
The evolution of net profits is, of course,
the ultimate indicator of how successfully
ETEBA, TE and ETBA accomplished their
developmental goals until the mid-1980s and
changed their business models during the
subsequent period.
Only ETEBA seems to have been
systematically profitable as its net profits
remained positive during the period 1970-
1997 while they reached much higher levels
during the next period 1998-2001 with a peak
in 1999 (Figure 6). As Table 3 depicts, on
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Fig. 6. ETEBA: Net Profits (Constant 1982 million Drs)
Source: ETEBA Annual Reports and author’s calculations
0.00
500.00
1000.00
1500.00
2000.00
2500.00
3000.00
Net Profits
4 Unfortunately, data for ETBA’s net profits is not available for 1964-1966 and 1969.
average, net profits before taxes for ETEBA
followed a rising trend throughout the three
periods of growth, crisis and deregulation.
TE and ETEBA exhibit a clearly different
pattern. From Figure 7 we observe that TE’s
net profits fluctuated initially at positive
values for the period 1965 – 1984 and
then turned negative. Because of the lack
of data for the period 1993-1995 and the
paradoxical outlier in 1996 we cannot reach
a safe conclusion for the bank’s financial
condition during its last years of operation.
However, looking at the summary statistics
in Table 4 we can conclude that due to a
prolonged and possibly unsuccessful period
of reorganization TE exhibited a falling trend
in mean profits from the mid-1970s to the
mid-1990s.
The pattern for ETBA is depicted in Figure
8 below4. Except for the period 1990-1997
and 2001, net profits are positive. However,
the losses during the 1990s outstrip by far,
in absolute values, any positive value in
profits before and after this period. Table 5
which presents the summary statistics in the
context of our periodisation provides a more
meaningful picture. The bank’s net profits
fall on average as we move from period to
period so as to present losses during the
deregulation period 1987 – 2002.
Hence, both TE and ETBA were
less successful in carrying out their
developmental role at a profit, particularly
when the financial regime called for a
change in their business model. Finally,
it seems that financial deregulation
increased the risk that these banks faced
as they were trying to adapt to the new
conditions. Indeed, the substantial rise
in the respective standard deviations
indicates that the riskiness of ETBA’s and
TE’s operation rose along with a fall in their
Alternative Financial Regimes
and Development Banks in Greece
1963-2002: What Have We Learned?
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Economic Alternatives, Issue 1, 2017
-400.00
-300.00
-200.00
-100.00
0.00
100.00
200.00
300.00
400.00
500.00
600.00
Net Profits
Fig. 7. TE: Net Profits (Constant 1982 million Drs)
Source: TE Annual Reports and author’s calculations
-25000
-20000
-15000
-10000
-5000
0
5000
10000
Net Profits
Fig. 8. ETBA: Net Profits (Constant 1982 million Drs)
Source: ETBA Annual Reports and author’s calculations
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average profits during the deregulation era
(Tables 4 and 5). Even ETEBA, the most
successful bank in profitability terms, had
to cope with a rise in the riskiness of its
activity during the deregulation period.
Indeed, as depicted in Table 3, along
with an average increase in net profits by
about 81% between 1975 – 1986 and 1987
– 2001, ETEBA had an enormous rise in
their variability by about 274%. For the
sake of comparison, the same figures for
the periods 1964 – 1974 and 1975 – 1986
were 258% (net profits increase) and 39%
(variability increase) respectively.
4. Conclusions
Conventional approaches to
development banks highlight criteria of
"functionality" or "efficiency" without
providing a comprehensive understanding
of the institutional connotations of
development banking. This paper
takes a different stance by considering
development banks within their institutional
environment, as organizations promoting
and being affected by institutional
change. Using as a historical example the
three development banks that operated
in Greece from the early 1960s until the
early 2000s, this paper attempted to
explain the patterns found in development
banks’ financial data by relating them to
government’s decision on the prevailing
financial regime. Internal transformation
was an imperative for development banks
as the government turned from supportive
– during the financial repression years –
into indifferent – during the deregulation
years.
Empirical findings were not
homogeneous among the three Banks.
ETEBA seemed to be the more successful
on financial grounds while TE suffered
great losses and entered a prolonged but
less successful period of reorganization.
On the other hand, ETBA as a state-
owned bank followed a different path
in many respects and seemed to have
disregarded criteria of private profitability
in favor of developmental goals set by the
government. Although the results for TE
are not clear, two issues stand out from
the comparison between ETEBA and
ETBA. Firstly, government ownership of
a development bank, such as ETBA, was
not conducive to its financial viability.
In addition, the closer was the control
of the government on a development
bank, the less successful had been its
transformation as the financial regime
changed.
Hence the need for change in
development banks' business model, which
was the inevitable outcome of financial
regime change, had rendered government
policy on the prevailing financial regime
the ultimate risk factor for these banks.
The way this policy was implemented was
crucial since development banks were
pushed to support failed firms during the
last period of financial repression and had
to cope with the competition from the tax-
exempt government bonds after the change
in the financial regime. In this sense,
government policy became a political risk
factor that preceded of any other financial
or economic risk factor which might have
affected the success or failure of these
banks’ internal transformation.
Ultimately, development banking did
not survive in Greece. However, this was
not the case in other parts of Europe or
across the world. Development banks,
which promoted economic development
in Europe and elsewhere, still play an
important role in modern economies.
Banks in developed economies such as
the German KfW, the Japan Development
Bank and the Business Development Bank
Alternative Financial Regimes
and Development Banks in Greece
1963-2002: What Have We Learned?
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Economic Alternatives, Issue 1, 2017
of Canada or in developing ones such as
Brasil’s BNDES and China’s Development
Bank are the most characteristic
examples (Lazzarini et al., 2015, De Luna-
Martínez and Vicente, 2012). The survival
of development banking in such diverse
economic and institutional environments
proves its ability to adapt successfully
to changing economic conditions and
financial regimes. However, as this paper
argues, the role of government policy
concerning the change of financial
regime is a crucial parameter. Hence,
a promising path for future research
might be a comparative study of the
relationship between different government
policies and the respective performance
of development banks among countries
with similar economic or institutional
characteristics such as those of Southern
or Southeastern Europe.
Useful policy implications can be drawn
as the paper corroborates the complex
relationship between government policy
and these financial institutions. One might
say that a possible use of development
banking to alleviate the woes of the Greek
economy in the current period of deep
recession should take into account the
two characteristics of development banks
outlined above: Firstly, that they should be
treated predominantly as a means to instill
institutional change in the sense of new
attitudes, perceptions and norms in the
entrepreneurial community as the economy
is looking for a new developmental model.
Secondly, that political risk precedes of
any financial risk these institutions face
and hence, government policy should
not compromise their status as financial
institutions but rather it should seek to
benefit from their dynamic nature and
ability to cater to the needs of the economy
under alternative financial regimes.
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