The Bank of Portugal’s latest report on the banking sector comes to the conclusion that the accumulation of bad debt in Portuguese banks is a risk to the stability of the financial sector.
The Bank of Portugal’s report points to the need for banks to reduce their bad debt and other non-performing assets in their portfolios, otherwise their profits will go down and their capital levels will be adversely affected.
"It is crucial to strengthen incentives to reduce the stock of credit risk and other non-income generating assets," concludes the report which clearly is designed to add weight the Governor of the bank of Portugal’s quest so create a ‘bad bank’ to hold all the toxic loans accumulated by years of poor decision making and reckless lending to poorly though through property development projects.
According to the report, it is necessary to go beyond the ‘prudential measures’ that have been adopted by Carlos Costa, for example, by eliminating existing legal and fiscal constraints that "hinder the ability of banks to dispose of these assets."
The Bank of Portugal says there is a bad debt pile of €18.5 billion but other, perhaps others are shoting about a range between €20 billion and €30 billion. When it comes to credit risk as opposed to unrecoverable bad debt, the figure is €242 billion, or 12% of the sector's loan book.
Keeping these toxic assets on balance sheets, continues the Bank of Portugal report in a long statement of the bleeding obvious, affects the ability to grant credit to the economy and aid a sustained and profitability recovery.
In the short term, it is necessary to speed up the process of cost cutting that is being carried out and this should be part of the brave new business model.
The report points out the three conditions essential to the success of a ‘bad bank’ that may be created to resolve the bad debt problem.
The document states that there must be an element of private funding, there must be a preliminary assessment of the assets in question and the scheme must respect the European regulatory framework.
Seldom has a Bank of Portugal report relied on such a simplistic analysis of the banking sector which nominally it regulates but making the words understandable to a five-year-old may be part of its remit of accessibility.
Whether the report is the right place to push for a ‘bad bank’ to rescue Carlos Costa from the whirlpool of adverse comment as to his abilities and performance, remains to be seen but an alalysis that states that banks have too much debt to perform is not worthy of a central bank in even the most basic economy.
Costa's 'bad bank' proposal suggests that the years of poor, weak or non-existent regulation that has led to enormous bad loan provisions in Portugal's remaining banks should magically be swept away, inevitably for the taxpayer to deal with, is too easy a way out for a governor whose removal is long overdue.
Photo: Miguel Baltazar/Jornal de Negócios
Comments
How will the creation of a bad bank help? It will take away from private banks the bad debts that they have created, and leave them free to create more bad debts. Where is the incentive to do better? Where is the disincentive to do the same again?
And will these toxic assets evaporate? I should think that under Costa´s scheme, the taxpayer will fund them.