The banking sector in Portugal has faced challenges in recent years, with several banks being fined for misconduct, and concerns growing among international bank creditors. Banking in Portugal is governed primarily by the Credit Institutions and Financial Companies Legal Framework (CIFCLF), the Bank of Portugal, and European Union regulations. The Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) regulate bank failure and resolution procedures in the European Union, including Portugal.
Several Portuguese banks have received hefty fines for misconduct. For example, Banco Espírito Santo (BES) was fined €4 million in 2014 due to violations of banking regulations. The Bank of Portugal did not shut down these banks as they deemed the infractions rectifiable, and measures were taken to improve internal controls and governance.
Bank Failure in Portugal
Bank failure in Portugal is defined as the inability of a credit institution to meet its financial obligations, maintain sufficient capital or liquidity, or comply with regulatory requirements, leading to insolvency or the likelihood of insolvency. Bank failure in Portugal is determined by the Bank of Portugal and the European Central Bank (ECB), who assess the financial health of banks through regular supervisory assessments, audits, and stress tests. Additionally, banks must maintain minimum capital requirements and liquidity ratios, and any breach may indicate a risk of failure.
The Bank of Portugal, as the national supervisory authority, is responsible for monitoring banks’ financial health and ensuring compliance with banking regulations. In cooperation with the ECB, the Bank of Portugal has the legal mandate to declare a bank as failing or likely to fail.
Once a bank is declared failing or likely to fail, the Bank of Portugal works with the Single Resolution Board (SRB) to initiate the resolution process. Common reasons for bank failure in Portugal include poor governance, inadequate risk management, and economic downturns.
Bank Supervision and Resolution Planning
The Bank of Portugal and the ECB implement supervisory measures to preserve critical banking functions and ensure their continuity during financial distress. Resolution planning involves preparing recovery plans, identifying potential obstacles, and establishing early intervention measures.
When a bank fails, the SRB, in coordination with the Bank of Portugal, initiates the resolution process. They consider factors such as the systemic risk posed by the bank, the need to maintain financial stability, and the impact on taxpayers before deciding on the appropriate resolution tools.
Portugal follows the BRRD and SRM guidelines, which provide several resolution tools, including the sale of the business, bridge bank, and asset separation. These tools aim to ensure an efficient resolution process, minimize the impact on financial stability, and protect taxpayers.
Protection of Account Deposits and Creditor Interests
Portugal has a Deposit Guarantee Fund (DGF) that guarantees deposits up to €100,000 per depositor and per institution. The DGF protects account holders in the event of bank failure, ensuring the recovery of eligible deposits.
Non-viable firms are guided to exit the market in an orderly manner through a combination of insolvency proceedings, regulatory interventions, and cooperation between the Bank of Portugal and other relevant authorities. These measures aim to minimize the impact on financial stability and prevent further contagion in the banking sector.
Bank Liquidation Rules for Portugal
In cases where a failed bank is not resolved, it may enter liquidation. Liquidation in Portugal is governed by the Insolvency and Corporate Recovery Code (CIRE) and the CIFCLF. The liquidation process involves the appointment of a liquidator, the valuation and sale of assets, and the distribution of proceeds to creditors according to their priority.
Portugal’s banking sector has faced challenges in recent years, but the country’s regulatory framework, bank supervision, and resolution planning aim to minimize the risks for international bank creditors. By understanding the processes involved in bank failure and the safeguards in place, creditors can make informed decisions and better protect their interests in the event of a bank failure in Portugal.