Credit crisis looming warns Constâncio

 In Banks, Economy, News

A former governor of the Bank of Portugal and also ex vice-president of the European Central Bank has warned that regulators will have to step in to avoid a looming credit default crisis this year.

Vítor Constâncio, a man who led Portugal’s banking watchdog which turned a blind eye to the so-called ‘casino banking’ scandals in the first 15 years of this century and which led to reckless, insufficiently-backed bank lending on big-ticket luxury tourism developments, and the collapse of the nations once most respected and oldest high-street bank, BES, now warns that a “credit crisis” in Europe, including in Portugal is looming by the end of this 2021 and into 2022.
He now calls banking and financial regulators to “do everything in their power” to avoid it. The current governor of the Bank of Portugal, Mário Centeno, said that the European Commission’s current concerns and policy over Non-Performing Loans (NPLs) is on the right track.
Vítor Constâncio, who took part in a virtual conference “The Portuguese Presidency: On the Road to a European Recovery Post-Covid” organised by the CFA Society Portugal in partnership with the CFA Institute, said that “a slowdown in lending growth was to be expected”, which would penalise the results of the banks, and said that there was also a prospect of an increase in credit defaults and provisions “this year and next” which would have an impact on “returns and capital requirements”.
“What will be the solutions if pressure on capital ratios materialises for a significant number of banks?” said the former Bank of Portugal governor, pointing out that any possible solution was fraught with difficulties.
In this regard, to deal with the negative consequences of weak capital ratios, the European banks could go a raise capital on the International money markets.”
However, that solution has its pitfalls, not just because of the low expectations that these lending institutions will have the capacity to report profits, but also because of a limited capacity to pay out dividends, which would make the banks less attractive and scare off investors who traditionally buy bank shares.
Another solution he says, one which is already in place, and which could be used by banking sector regulators, like the Bank of Portugal, would be giving more capital cushioning. “But that solution faces market pressures, with most banks fearing using such relief because the reduction in capital ratios could cause an increase in financing costs, i.e., the costs of borrowing.
A fourth solution, which Constâncio calls the “solution of last resort” which means “injections of public capital (i.e., taxpayers’ money) to directly or indirectly help asset managers in “treating” credit defaults which would increase and would have to be resolved.”
“If these pressures happen, and if a subsequent recognition of NPLs and credit defaults occur in significant numbers, there would be a problem and the regulators will have to do everything that they can to avoid a credit crisis at the end of 2021-2022,” warned Vítor Constâncio.