Bank of Portugal gives banks one more year to shore up capital reserves

 In Banks, Economy, News

Portugal’s clearing banks have been given an extra year to comply with a Bank of Portugal regulation that they must have a capital reserve to cover the inherent risks from their lending activity.

This alleviates the prudential ratios that CGD, BCP, Santander, Novo Banco, BPI and Banco Montepio for another year which will be welcome considering the loans and graces they have had to give businesses as a result of the Covid-19 pandemic.
The Bank of Portugal sent a communiqué to ‘Institutions of Systemic Importance’ in which it extended by one year the gradual implementation of a reserve of own funds.
The creation of a cash cushion to offset risk was defined in 2017 and reviewed in 2019 for O-SII or ‘Other Systemically Important Institutions Capital Buffer.
It is one of the instruments available in the BdP’s macro prudential tool kit aiming at addressing the macro-prudential policy intermediate objective of preventing the buildup of systemic risk arising from misaligned incentives and moral hazard. (In other words reckless lending, poor judgment decisions on loans and loans going bad.)
The authority can impose higher capital requirements on O-SIIs of between 0 and 2% of the total risk exposure amount in order to offset for the higher risks that these institutions pose to the financial system due to their size, importance for the economy, complexity or degree of interconnection with other financial sector institutions and, in the event of insolvency, the potential contagion of these institutions to the rest of the non-financial and financial sectors.
This latest decision by the Bank of Portugal which supervises the nation’s banks, adopted 7 April 2020 is part of a wider package of measures to the Covid-19 crisis aiming to make sure that the banking system maintains credit open to the economy during a period characterised by considerable liquidity restrictions endured by families and companies.