The new regulatory standards mean that banks and companies will have to recapitalise

Professor António de Sousa

The Portuguese banking sector has been resisting the financial crisis that began in 2007 remarkably well, in spite of the problems caused by successive reductions in Portugal's ratings and a money and financial markets that have experienced some hard times.

As we all know, the financing of our economy in general and the whole business sector in particular, with the exception of a few large companies, comes exclusively from the banking sector. The financial institutions' resistance and solvency enabled them to maintain credit to companies and there was even a slight increase in 2008 and 2009, which was actually much higher than the performance of the economy as a whole.

It was this efficacy in granting credit that allowed rapid access to successive lines of credit for SMEs provided by the government, which helped many companies to get through the worst of the crisis.

Support for the operation, exports and international expansion of Portuguese companies has thus kept up and even increased, especially for companies that were able to take a strategic position and take advantage of new market opportunities. In addition to credit, we also have to take account of other instruments, such as venture capital, which have been offered by a number of credit institutions in recent years.

Nonetheless, as everyone knows, new regulation and supervision mechanisms are being discussed and implemented.

This new framework, which will contribute to a more solid, transparent financial system that is immune to systemic crises that jeopardise the normal financing of business activity, has a number of impacts on credit. The most important will certainly be the need to allocate more capital to credit operations. This will entail the need to increase capital in the banking system in order to maintain the same levels of credit.

Another no less important consequence will that companies will obtain finance more from equity on pain of the own capital cost of credit operations becoming prohibitive for the banks. In this area, the recapitalisation of the business sector, whose accumulated debt in relation to Portugal's GDP is one of the largest in the Eurozone, is crucial. It is also essential to improve the quality of financial information given to banks or it may not be possible to optimise the capital associated with less transparent operations with companies, which necessarily be reflected in their financial cost.

In short, we have a financial system that has come out unscathed, unlike so many others in a wide variety of countries in the three years of the crisis. The new rules and underlying business models will however, require banks and companies to recapitalise in order to maintain and increase their the level of economic activity in Portugal and their strategic capacity in the international markets.

July 2010