An extract from The Banking Regulation Review, 11th Edition
Prudential regulationi Relationship with the prudential regulator
Given its participation in the SSM, the BOP qualifies as a national competent authority, which implies that Portuguese credit institutions considered as significant are supervised by the ECB, while those deemed less significant are directly supervised by the BOP and indirectly by the ECB.
Four groups of banks supervised by the SSM are considered significant.
The main means of supervision by the BOP are as follows:
- issuance of notices and recommendations regarding rules of conduct for the management of banks;
- establishment of rules of conduct for banks ensuring transparency of information during the pre-contractual and contractual stages (including the verification of maximum rates and charges for banking services rendered by credit institutions);
- assessment of complaints presented by banks' customers;
- analysis of the information regularly reported by banks;
- assessment of banks' exposure to risks, and of the adequacy of banks' strategies, mechanisms and procedures to mitigate those risks;
- analysis of the results of the stress tests imposed on banks;
- evaluation of systemic risks; and
- on-site inspections.
The BOP has the power to enforce Portuguese banking laws and regulations through:
- fines and ancillary penalties;
- injunctions for the fulfilment of certain duties;
- seizure of documents and valuables;
- special audits through on-site inspections; and
- withdrawal of a bank's authorisation.
Following the 2008 financial crisis, Portuguese banks were required to increase their own funds and restructure their capital to meet the new requirements on minimum capital, in addition to providing information on complex financial instruments and implementing new depositors' protection rules. The rules applicable to the recovery and resolution of credit institutions also went through a major review and change.
On-site inspections on a permanent basis became a normal practice.
The CMVM is the relevant supervisory authority for the financial intermediation activities pursued by Portuguese credit institutions and financial companies and their activities in the stock markets. It is entrusted with the task of supervising and regulating securities and other markets in financial instruments, as well as the activities of all those who operate within said markets.
The supervision carried out by the CMVM includes the following:
- constant supervision of the acts of individuals and entities that operate in capital markets for the purpose of detecting unlawful acts, particularly in stock market trading;
- monitoring compliance with rules;
- detection of criminal offences;
- punishment of infringers, namely by the imposition of fines;
- granting registrations of individuals and transactions to check compliance with the applicable rules; and
- information disclosure, particularly on listed companies, through its website.
The board of directors of a credit institution (with at least three members) has prominent powers to manage the operations and financial matters of the entity. Members of the management and supervisory boards and senior management must comply with the requirements set forth in the RGICSF, and the regulations issued by the BOP on suitability, professional qualifications, independence and availability. Additionally, members of the management and supervisory boards of credit institutions that are significant in size may not hold more than four non-executive positions simultaneously, or one executive position with two non-executive positions, with the exception of positions in management and supervisory boards of entities included in the same banking supervision consolidated scope. The RGICSF requires credit institutions to put corporate governance arrangements in place that are sound and proportionate in view of the risks taken by the institution.
Significant attention has been devoted to remuneration policies during the past few years, as has been the case at both European and international levels. In particular, the RGICSF includes the provisions of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV), both of 26 June 2013, relating to the obligation of credit institutions to put in place remuneration policies that are consistent with their risks. In summary, these provisions relate to the obligation to make a clear distinction between the criteria used for setting fixed remuneration and variable remuneration; the obligation that the remuneration policy is subject to the approval of the shareholders' general meeting; and the principles that will apply to variable elements of remuneration.iii Regulatory capital and liquidity
The rules on capital adequacy requirements have undergone deep reform with the entry into force of the CRD IV package, which created a single rule book throughout the European Union in this domain.
Portuguese law establishes minimum share capital requirements for each type of credit institution – including banks – and financial companies. For instance, banks are required to have a minimum share capital of €17.5 million, and investment firms are in general required to have a minimum share capital of €5 million.
In addition, since 1 January 2014, the rules on regulatory capital adequacy requirements have been harmonised throughout the European Union. Hence, banks and other credit institutions as well as investment firms must meet the rules on regulatory capital and liquidity established by the CRD IV package.
Under the CRR, institutions must maintain a Common Equity Tier 1 (CET1) capital of at least 4.5 per cent of their risk-weighted assets (RWAs), a Tier 1 capital of at least 6 per cent of their RWAs and a total capital of at least 8 per cent of their RWAs.
As at the third quarter of 2019, the CET1 ratio of the Portuguese banks stood at 13.9 per cent measured as a percentage of the RWAs.
The BOP is entitled to demand that credit institutions and financial companies promptly adopt the measures or take the action necessary to overcome any non-compliance by them with the rules regulating their business, including the capital adequacy guidelines.
Among the powers granted to the BOP for this purpose is that of suspending or substituting one or more members of the management and the supervisory corporate bodies of a credit institution, and the power to appoint both a provisional board of directors and a supervisory committee or a sole supervisor.
If a credit institution becomes undercapitalised, the BOP may apply corrective measures over the entity in distress, which may consist of, notably, the presentation by the entity of a restructuring plan setting out:
- measures such as a share capital increase, a reduction thereof or the disposal of shareholdings or other assets;
- the suspension or substitution of one or more members of its management and supervisory corporate bodies; or
- making certain acts or transactions subject to the prior approval of the BOP.
Where the corrective measures applied are not sufficient for the credit institution to recover, or they are deemed insufficient for the purpose, the BOP may also choose to appoint a provisional board of directors, to apply a resolution measure (in certain circumstances) or even to repeal the authorisation of the credit institution in Portugal, causing its dissolution and winding-up.
Further changes are expected, most notably those resulting from the adoption of the acts implementing the CRD IV and the CRR, which are to be enacted in the near future.iv Recovery and resolution
The BOP is the competent regulatory authority for the purposes of approving and implementing resolution procedures in this jurisdiction.
The BOP may apply certain resolution measures in the event that a bank is in a situation where it may need to cease to be duly authorised for the pursuit of a banking activity (or presents a serious risk of non-compliance), which may consist of either the disposal, in part or in whole, of the business of the credit institution to another credit institution, or the transfer, in part or in whole, of its business to one or more transition banks, to be funded by the Resolution Fund, which shall be supported by contributions from Portuguese banks. Among others, the RGICSF establishes three situations deemed as a serious risk of non-compliance: when a bank's losses surpass its share capital; when its assets are lower than its obligations; or when it is unable to fulfil its obligations.
The resolution measure must be adequate and proportional in terms of its possible (or likely) consequences on the financial soundness of the institution, the interests of its depositors and, generally, the effects of the resolution on the stability of the financial system. Since 2010, we have witnessed the resolution of four banks: Banco Privado Português, Banco Português de Negócios, BES and Banif.
With the enactment of the Banking Recovery and Resolution Directive (BRRD), the EU Member States created a harmonised framework to address certain financial institutions that are failing or likely to fail, with the intent of preventing their insolvency or to minimise the negative consequences arising from insolvency. Hence, Portuguese law, in line with the BRRD, establishes an order of priority regarding liability for the losses of an institution: first, the shareholders are held liable for the losses, and only subsequently are the creditors held liable. No creditor can be put in a worse situation resulting from a resolution measure than it would be in a standard winding-up procedure.
The conditions that may evidence the existence of risks that jeopardise the ability of a credit institution to comply with its legal obligations and therefore trigger a resolution procedure are the following:
- risk of non-compliance with the minimum mandatory legal requirements regarding capital adequacy ratios;
- existing difficulties in maintaining a stable liquidity situation, which can lead to non-compliance with the legal duties imposed on credit institutions;
- the system of governance in place or the management corporate body of the credit institution can no longer provide adequate assurances of sound and prudent management undertakings; and
- the accounting organisation or the internal control system of the credit institution presents serious deficiencies that prevent a proper evaluation of the financial situation of the institution.
Under such circumstances, since 1 January 2016, the BOP, with the ECB, is allowed to directly intervene in a failing credit institution or investment firm and apply certain measures called resolution tools, which are as follows:
- partial or total transfer of the business to another authorised institution;
- partial or total transfer of the business to a bridge bank;
- segregation and partial or total transfer of the business to asset management vehicles; and
- bail-in procedures (imposing direct losses on creditors – bondholders and depositors – of the institutions).
When addressing a failing institution, the regulatory authorities are entitled to adopt one or more resolution tools as they deem appropriate for each case.
Whenever adopting these measures, the BOP must follow certain general principles, such as shareholders bearing the first losses and creditors bearing losses thereafter in accordance with the priority of their credits, as well as creditors of the same class being treated in an equitable manner.
Whenever a resolution measure is applied, the members of the management and supervisory corporate bodies (as well as the certified public accountant or the company responsible for the legal certification of the entity's accounts) are dismissed, unless otherwise determined by the BOP. In such an event, the BOP shall appoint new members to the management and supervisory corporate bodies. In this scenario, the members of the management corporate body will have full capacity as recognised by law and by the articles of association to both the shareholders' general meeting and the management corporate bodies. However, that capacity may only be exercised under the guidance of the BOP.
Each deposit-taking institution must have in place a recovery and a resolution plan. These plans must be submitted to the BOP and must be drafted in accordance with the applicable legal requirements. The recovery plan has the purpose of identifying the measures that must be applied when an institution is in a situation of financial imbalance (or, at least, when there is a risk of getting into such a situation). In contrast, the resolution plan must ensure that all the relevant information is provided to the BOP to allow an orderly resolution of the bank through the application of resolution measures.
With the exception of certain definitions concerning the ranking or priority of creditors, local insolvency rules (e.g., insolvency procedures and clawback rules) shall not apply.
Portuguese law first enacted resolution measures in 2012 (the first version of the BRRD dates back to 2011), and the BRRD was fully implemented in Portugal by August 2015, although certain measures only entered into force on 1 January 2016.