Is There Excess Capacity in the Greek Banking System?

The introduction of the Euro and the advent of technology are expected to influence profoundly the structure and the strategic orientation of most fin European banking systems. In this context, the Greek banking system is undergoing a process of adjustment to the new environment The initial response of Greek banks to the changing environment is to rationalise their cost structure or engage in consolidation activity. At the same time, they re-examine their business mix and expand their presence abroad in order to safeguard their profitability. In view of increasing disintermediation, Greek banks are rebalancing their business mix away from interest income generating activities towards fee income activities. Greek banks already enjoy the highest non-interest income to total average assets ratio amongst all European banking systems. The different nature of the traditional banking products implies that Greek banks already are and will continue to be increasingly involved in a process of redesigning their products and procedures. This study employs several techniques in order to assess the extent to which excess capacity is present in the Greek banking system. Given the recent deregulation and the low degree of sophistication of the country’s banking system, the study focuses on whether increasing demand for financial services, given the transition to a low and stable interest rate environment and the increasing sophistication of the financial services industry, is sufficient in order to absorb the excess capacity in the system, or whether a deepening of the consolidation/downsizing process is in the cards.