Understanding the evolution of the Greek banking system especially the development of the loans (on the asset side) and deposits (on the liabilities side) presents a major challenge to say the least. This is because the Greek banking system has been buffeted by a series of negative but also positive shocks that at times have forced the two sides of its balance sheet to move (sometimes violently) in oppositive directions. As a result, when we examine the statistical relationship (over the entire modern history of the Greek banking sector) of loans vs deposit or loans vs economic activity (especially investments), we cannot establish any meaningful statistical relationship.
Yet if - with the power of hindsight – decompose this entire era into 4 distinct sub-periods, then a much more meaningful sequence of events and patterns is revealed.
The trajectory and resilience of the Greek banking system are inextricably linked to the evolution of the Greek economy. This is because the ability—or lack thereof—of Greek banks to finance businesses and households by transforming domestic savings into loans plays a pivotal role in both the levels of economic development and the process of capital accumulation within the domestic economy. For this reason, the estimation of banking metrics such as capital adequacy, credit expansion, and deposits are of interest not only to those active in the banking sector. On the contrary—and rightly so—they attract the attention of a broader segment of Greek society and the business community.
However, despite the apparent simplicity of the subject, gaining a deeper understanding of the banking system’s trajectory, particularly the interaction between credit expansion and deposit adequacy, presents several challenges. First, one must consider the tectonic shifts within the Greek banking system. During the Greek crisis, large amounts of loans were written off, securitized, sold to foreign and domestic investment funds, or transferred to non-performing loan management companies, among other measures. Simultaneously, on the deposits side, there were significant capital transfers abroad, massive cash withdrawals, and, in recent years, a return of funds to banks. As a result, changes in balances—the total accumulated stock of loans and deposits—were driven by idiosyncratic factors, entirely disconnected from the economy's trajectory. For this reason, our analysis and conclusions are based on monthly net flows of loans (i.e., new disbursements minus repayments of existing loans) and deposits (new deposits minus withdrawals/transfers) throughout the period 2002–2024.
The second challenge involves addressing a widespread misconception regarding the direction of causality between loans and deposits. Although, at first, the existence of deposits is a prerequisite for granting loans, in later stages of development, it is the granting of loans that “creates” the largest portion of deposits in the economy. Simply put, every time a bank grants a loan, a corresponding deposit is created somewhere in the economy. This process has led many to talk about “banks creating money” in the economy. In conclusion, in our analysis, we focus on the net flows of loans and deposits and assume that causality flows from loans to deposits.
Armed with these clarifications by examining the trajectory of net flows of loans and deposits, we can identify four distinct periods up to 2024 and the period of a new normality in the future:
[ 1 ] The period of the old normal (2002–2009)
Starting from very low levels of leverage, the reduction in interest rates due to the adoption of the Euro, led to rapid credit expansion and a corresponding increase in deposits. Consequently, there was a strong positive correlation between loans and deposits, where every euro of loans “created” €0.95 in deposits. At the same time, the loans-to-deposits ratio increased from 63% in Q1 2002 to 105% in Q4 2009.
[ 2 ] The Crisis Period (2010–2015)
During the crisis years, we observe a complete decoupling of the trajectories of loans and deposits. New loan disbursements froze, and net flows turned negative as a result of the gradual repayment of existing loans. In contrast, the deposits side experienced violent capital withdrawals in two phases: initially during 2010–2012 and later from Q4 2014 to Q2 2015. Deposit outflows were abruptly (and permanently) halted by the imposition of capital controls on June 28, 2015. Despite deleveraging, the loans-to-deposits ratio at the end of the period (Q2 2015) surged to 170% due to the collapse of deposits. To address the mismatch between loans and deposits, emergency financing from the ECB ( through ELA) amounting to €87 billion was provided. Simultaneously, additional cash inflows of €19 billion from the ECB were required. Throughout the period, the change of the net flow of loans by €1 coincided with the reduction of deposits by €2.46.
[ 3 ] The Normalization Period (2016–2019)
The period following the signing of the third bailout agreement and the definitive avoidance of the so-called Grexit—combined with the implementation of capital controls—was characterized by the gradual return of deposits. The superfluous cash was gradually returned, and by the end of this period, reliance on the ELA was essentially eliminated. In contrast, the flow of loans remained marginally negative, as new disbursements were insufficient to offset repayments of old loans. Consequently, the correlation between loans and deposits remained negligible, while the loans-to-deposits ratio settled at 107%.
[ 4 ] The COVID/Post-COVID Period (2020–2024)
The process of strengthening of the deposit base accelerated during the COVID period due to social transfers from the EU and the government to businesses and households. After the pandemic, disbursements of loans from the Recovery and Resilience Facility (RRF) led to positive net credit expansion flows for the first time since 2009. However, the momentum of deposit returns was so strong that every euro of loans corresponded to €1.4 in deposits (until Q3.24). Consequently, the loans-to-deposits ratio fell to 60%.
Having gone through this historical review, the question that arises is: what will the trajectory of banking developments look like in the near future.
The Era of New Normality (2025 - ...)
My estimation is that the era of new normality will be a blend of characteristics from the old normality and the post-COVID era. As in the old normality, the relationship between loans and deposits will continue to stabilize. This will occur because the independent growth of deposits will diminish as external resources outside the banking system become exhausted, and the social transfers from the pandemic will not be repeated. At the same time, continued economic growth will necessitate an acceleration in leverage and borrowing. However, one feature of the post-COVID era that I believe will "survive" into the new reality is the faster growth of deposits compared to loans. The reason for the persistence of this paradox lies in the method of financing investments included in the Recovery and Resilience Facility (RRF). These investments are financed 50% by EU resources, i.e., deposits that were initially outside the Greek banking system. Consequently, in the near term, it is likely that deposit flows will continue to exceed loan flows.
