Why big fat Greek bank premiums?

National Bank of Greece depository receipt certificate (source)

If you're like me, you like to: 1) explore markets abnormalities; 2) a combination of stock analysis and monetary analysis, then you will love this post. Sneak peak: By the end, we can use the stock market to find an unofficial exchange rate between the euro area and non-euro Greek Greece.

In the past few weeks the Bank of Greece shares from their depositary receipts overlying clear differentiation (see below). A little background first. TDR is a lot like an exchange-traded fund, in addition to an equity ETF have different bundle, a depository receipt on behalf of just one stock. The stock is usually listed on the road beyond the market (such as Greece), while the major trading exchanges such as New York's Depositary Receipts. Investors interested in owning foreign stocks, you can avoid currency exchange costs and foreign concessions, but rather to buy New York-listed depositary receipts of mind.

Under normal circumstances, a parent and their descendants should be consistent security transactions each other. Recently, however, the National Bank of Greece, Alpha Bank's Depositary Receipts listed in the United States has risen to a massive listing of Greece with respect to their parents' premium. € For example, in mid-August, investors can buy the National Bank of New York-listed depositary receipts of 0.73, however, listed on the Greek stock exchange only € 0,60. For some reason, investors pay more than 30% of the security, to make the same income stream. We've got a serious violation of the law of one price. *

This is particularly interesting because for redemption depository receipts / create mechanisms through price arbitrage link parent and offspring. In the same way, investors cash deposits in the bank, and get the bank deposits, investors can buy shares listed on the National Bank of Greece in Athens and 'deposits' share of the custodian, depositary receiving returned to New York -listed a newly created credentials. If any one security, you can not buy, in addition, arbitrage opportunities arise. For example, in mid-August will (theoretically) to buy Greek shares listed on the National Bank of Greece € 0.60 converted into New York-listed depositary receipts, sales of depositary receipts of income from the new cable € 0.73 New York to Greece, and to repurchase shares of € 0.60 Greek National Bank of Greece listed. Rinse and repeat. (This is another way to work, but also in the same way that bank deposits can be converted into cash, investors can purchase and redemption of depositary receipts underlying stock.)

The effect is that investors clamor to gain arbitrage profit, and any premium or discount depositary receipts and shares listed in New York between the Greek parent company should quickly drop to zero. Why does not this have been the case in recent Greek?

There are several explanations depositary receipts and the underlying shares continued premium / discount. The first is the difference in liquidity. If depository receipts than the underlying stock more liquid, so investors will be willing to pay a bit more depositary receipts. In the case of National Bank of Greece, the depository receipts tend to attract more than the bottom of the Athens-listed shares, which may explain why income tend to trade at a premium higher transaction volume.

When redemption / creation mechanism is suppressed premium or discount may also occur. Taipei depositary receipts listed on the Taiwan Semiconductor rose to an incredible 60% premium to the shares in the late 1990s and early 2000s. The reason for this can be traced back to Taiwan premiums restrictions on foreign ownership of local enterprises facts. This effectively prevents the closing of the land is converted into depositary receipts by buying local shares. These premium evaporated to remove restrictions on foreign ownership of Taiwan, in 2003 (which is a good summary).

In the 2006 paper, Mr. Saxena found that few Indian stocks, including New York, Infosys, Wipro Corporation, State Bank of India, MTNL, ICICI Bank, HDFC Bank and Satyam Computer listing of depositary receipts, habit of turnover at a substantial premium to the underlying shares listed in India. Since 1999, its US-listed, however, Germany, Korea Infosys's premium (which reached 60% in 2002) already exists, and listed company in Hong Kong and New York-listed depositary receipts showed negligible premium.

Why is this so? Mr. Saxena found that Indian Depository Receipts from the limited two-way interchangeability affected. Warehouse receipts can be freely converted into the Indian stock market, but the Indian-listed stocks can only convert into depositary receipts within the range of available "head space." In the past converting depositary receipts into shares, the amount of headroom in turn dependent. Because the shares have been exhausted clearance, except when investors flocked to buy American depositary receipts, thus promoting its premium relative shares of a listed Indian, there is no way to get arbitrage closed.

In the case of Greece, the capital controls on June 29 seems to have inhibited the implementation of the redemption / creation mechanism. The closing day of the Athens Stock Exchange (New York-listed income continuous trading), but when it reopened on August 3, capital controls still exist. Since the reopening, the wedge between the prices in Greece has emerged depositary receipts and the underlying shares of the National Bank, which means that there has been more demand for the former than the latter. Under normal circumstances, arbitrageurs will narrow that gap, buy the underlying stocks listed on the Athens to become the new deposit receipts. Presumably, the Greek authorities have asked the agency to stop to allow the Greek banking shares converted into income, so the arbitrage is also impossible.

Ended August 27, 2015 according to the press release the Bank of New York Mellon, depositary receipts converted to clarify the requirements of the Greek authorities was finally received, therefore, the deposit receipt book will be re-opened, the issuance and cancellation. With the ability of the underlying stock is available again, arbitrage benefits and premiums when the National Bank of Greece Depositary Receipts from the collapse of about 30% to 10%, the market opened on August 28 has been shrinking since, currently at in its historical range.


This also explains the anomaly and it's gone. However, this is not the end of the story. Looking to the future, look at Greece's National Bank depositary receipts in relative prices and stock prices may provide valuable insights.

Allowing depositary receipts redemption and creation, the Greek government has effectively eliminated capital controls. Currently, Greece does not exceed € 420 a week to extract cash from their own bank accounts, may not exceed € 500 per month transfer to foreign accounts. Enterprises must go through the cumbersome application process to access their funds. However, with the window open depository receipts, businesses and individuals can simply put the National Bank all bank deposits in the Athens market, converting the shares into depositary receipts in New York sold the dollar, euro and convert the flow of capital. Look, evade capital controls.

This loop hole does not seem very fair to me. After all, only the financial elite will know Depositary escape, widows, orphans, the remaining capital controls has been lifted effective forgotten. Depositary Receipts window meaningful loose, if it is twinned with similar efforts to help the general public, said a higher ceiling on withdrawals.

Depending on how close the Greek capital controls constraints shares are listed on the National Bank of Greece in Athens may actually lose its traditional discount, up to a premium relative to the New York-listed depositary receipts (in euros) of. If depositary receipts is the best way to circumvent capital controls, so desperate to get their money from those who would be willing to pay the Greek "fee" for the privilege. Shares in National Bank of Greece by Athens to buy, say 0.65 euros, and converted into a transaction just 0.60 euros, 0.05 euros investors effectively lose depositary receipts. That fee, premium scale, will be equal to the cost of the next best alternative to evade capital controls. If the control is leaking, the premium will be small. If they are not, it can be quite wide.

Several studies have found that, when the Argentine Milito, Buenos Aires-listed shares rose a huge premium relative to their New York-listed depositary receipts. Brechner, for example, finds that reached more than 40% in January 2002 premiums this gap as the representative of Argentina is willing to pay to use depositary receipts as a means to their wealth from Argentina freezing of bank deposits into a liquid amount of US bank deposits. When the share conversion rate limit in March 2002, the premium disappears.

Greece seems to be on its way to being repaired. Loosen capital controls as soon as possible, and people no longer seem to worry about to convert drachmas. Therefore, if the premium stock local National Bank of Greece is to develop, I doubt it would be much better, as sort of a premium in Argentina prevailed. However, if things continue to deteriorate, we may see a big development gap.

Finally, now converted depositary receipts have reopened, but capital controls remain in place, the exchange rate of the National Bank of Greece shares listed on the Athens and New York-listed depositary receipts as between the "black market" in Greece and non-euro rate - Greek euros. After Chavez capital controls in 2003, Venezuelans Caracas transactions using CA National Telefonos Venezuela (CAN TV) with respect to the New York-listed shares as depository receipts shadow speed rate between the Venezuelan Bolivar, Until the nationalization of CANTV, 2007. Similarly, the burden of capital controls, Zimbabwe Zimbabwe Stock Exchange and with the exchange rate that was hidden Zimbabwe dollar stock is listed on the London-listed Old Mutual between. It even has a name: the OMIR, or Old Mutual implicit price.

So, looking at the National Bank of Greece shares to depositary receipts rate closely. It conveys information to the Greek euro.

* More specifically, depository receipts traded as US $ 0.83 to calculate the price of their own euro, I use 9: 30-10: 30 Price National Bank of Greece Depositary Receipts listed in New York, and converted into euros, when the dollar against the euro.

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