Government asks banks to finance 100% of Novo Banco cash injection

Portugal’s banks have been contacted by the government to foot the bill for the entire €500 million that Novo Banco needs to keep its capital ratios within the limits set down by the European Central Bank.

The banks were contacted by the Ministry of Finance and the Resolution Fund “inviting” them to finance the capital injection into the bank which is owned by the US vulture fund Loan Star.
The banks have been asked to bail out Novo Banco again on he back of an agreement whereby all the banks pay to ensure the troubled bank keeps its accounts in the black. This agreement is called the Contingent Capital Mechanism.
Regulators have embraced the idea of pre-arranging bank recapitalisations through (funded or unfunded) contingent capital issuance. Contingent capital is intended to be triggered when a bank is headed toward failure to provide an automatic equity injection that keeps the bank out of distress.
Novo Banco has been “in distress” ever since it was saddled with the toxic inheritance of collapsed Banco Espírito Santo in 2014.
The Portuguese government and the European Central Bank did this at the time because there was a contagion and systemic risk for the rest of the country’s banking system.
Novo Banco is hardly flavour of the month at present among the nation’s bankers since it announced that it was in the running to buy an interest in EuroBic which is up for sale – the argument no doubt being that if it has the money to buy into another bank, it has the money to foot its own bills.
The money that Novo Banco needs now includes €166 million to cover the bank’s losses at its Spanish arm Novo Banco Espanhã.
The Resolution Fund which was set up to provide capital for Novo Banco has refused to pay for the bank’s losses in Spain and has sent a document outlining its doubts and reservations to an arbitration court.
Novo Banco announced at the end of March that it would request €598.3 million from the Resolution Fund. The bank presented losses of €1.3Bn for 2020.