Press release

21st May, 2013

The Portuguese banking system is not in the same situation as Cyprus, because the Portuguese banks are in good shape, properly capitalised with high solvency and comfortable liquidity. This means that deposits in Portugal are perfectly safe.

What the European banking system is doing is taking preventive measures to strengthen the banks and step up their supervision and monitoring. The former are designed to make the system sounder with stronger balance sheets (such as the new regulation and new directive about capital requirements and liquidity in the system, phases of which will begin implementation in January 2014). The latter (Directive on Recovery and Resolution of financial institutions, which is still being prepared) is designed to make the European system more transparent and its supervision stronger so that financial institutions are more directly monitored and reduce their insolvency risk.

The new preventive mechanisms for monitoring financial institutions in Portugal were included in our legislation in late 2011 and have been implemented by Banco de Portugal since 2012. The banks now have to draft recovery and resolution plans that must be agreed upon with the regulator.

At the same time, the new European law on the recovery and resolution of financial institutions will introduce new mechanisms preventing uncontrolled their liquidation, with all its negative effects and chain reactions with an impact on the country's public finances and cost to its taxpayers (bailout).

It is precisely a concern for safeguarding taxpayers' interests that has led legislators to exclude state assistance whenever a financial institution is in crisis and having solvency problems.

On the other hand, the option being considered is that of rationalising the institution and obliging the shareholders and holders of other securities to be the first to absorb a bank's losses. If the decision is to resolve (and not liquidate) the financial institution, other mechanisms will go into action, such as a bridge bank sale of assets, possibly accompanied by a need for a bail-in, including conversion of some bank liabilities into capital as necessary, in the normal order of priority in a liquidation (unguaranteed subordinated debt first, followed by unguaranteed senior debt). Guaranteed deposits up to 100,000 euros, debts to the state, social security and workers and guaranteed debt (such as covered bonds) will be excluded from this bail-in.

As for unguaranteed deposits (i.e. those above 100,000 euros), in the event of resolution of a bank, the solution will be more favourable than in it is now for liquidation of a bank. This is because, in the event of resolution of a bank, unguaranteed deposits will receive preferential treatment over other unguaranteed senior debt. Like unguaranteed senior debt, they may also be included among the bail-in instruments, but always as a last resort and only as necessary. At the same time, banks will be obliged to increase their equity and liabilities subject to bail-in (other than deposits) so that they have a substantial cushion of additional instruments for absorbing losses and reducing the likelihood of having to use unguaranteed deposits.

The new rules on resolution of banks are much more favourable to depositors than the previous ones, which only covered liquidation, not only because they include mechanisms to prevent banks' financial situation from deteriorating and intervene early if it shows signs of doing so, but also because they have mechanisms to resolve instead of liquidating banks, thereby saving their quality assets and protecting depositors' interests more effectively.

Portuguese Banking Association