Greek banks: what happens next ?

Greece

The specter of a run on Greek banks is looming, as yet another round of talks spark concerns about their ability to secure further ECB assistance.

The specter of a run on Greek banks is looming, as yet another round of failed rescue-for-reforms talks spark concerns about the lenders' ability to secure further European Central Bank (ECB) assistance.

The valuation of the Greek banking sector has fallen by nearly a third since the start of June as concerns about the risk of Greece leaving the euro zone grow.

On Friday morning, banks were open in Athens city center and there seemed to be a steady stream of people making withdrawals at ATMs, as observed by CNBC. The mood appeared calm and there weren't any lines forming - and it is difficult to judge whether the banks were any busier than usual on a Friday morning. 

Of course, measuring ATM queues doesn't take into account the number of people transferring money in other ways. Also, Greece is still an economy where many of the transactions that are done via credit cards in other Western countries are regularly done in cash.Yannis Stournaras, governor of the Bank of Greece, Greece's central bank, said on Friday that he "confirms the stability of the banking system."

There are still a number of moving parts governing what will happen to Greece's banking system.

Let's not forget, there has already been plenty of money pulled out of Greek banks. Capital flight out of the country's lenders has been a steady flow since the financial crisis began in 2010, but it has intensified in recent weeks. So far this year, 40 billion euros - around 25 percent of deposits - have left Greece's banking system, according to Citi estimates. On Thursday alone, deposit outflows were above 1 billion euros, according to a Reuters report.

Greek banks have been able to cope with these outflows because of the backstop provided by the ECB - known as emergency liquidity assistance (ELA). Yet this is now under threat.

On Friday, the European Central Bank governing council will hold a conference call to discuss whether or not to give Greek banks further funding via the ELA, according to CNBC sources.

There is no doubt that Greek banks need this funding. The Eurosystem funding is now around 31 percent of the banking system assets, according to Citi calculations.

On Monday ECB President Mario Draghi told European lawmakers that so far the bank had helped out Greek lenders to the tune of 118 billion euros ($133 billion) - about 66 percent of Greece's overall economy. At the end of 2014, that sum was only half the current level.

There will be three options on the table, according to CNBC sources with knowledge of the situation. The first is immediately stopping ELA, triggering a collapse of the banking system - a nuclear option which is understood to be very unlikely. The second is not increasing ELA - which would trigger capital controls, limitations placed on the movement of capital which are usually associated with struggling emerging market economies.

The third is to increase ELA, as the Greek banks have requested, but under the condition that next week's summit must yield a result.

A two-thirds majority has to be in favor of one of these options. And if the ECB picks one which could contribute to Greece leaving the euro area, then this conference call could be seen by history as one of the most significant hours of the crisis.

- By CNBC's Catherine Boyle. CNBC's Annette Weisbach in Brussels and Katie Slaman in Athens contributed to this report.

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