Brussels points out "significant deficiencies" in the management of Novo Banco when it was created in 2014, at a cost of €4.4 billion, and run under the control of the Bank of Portugal until it was sold in October 2017 to the US vulture fund, Lone Star.The European Commission points out significant shortcomings in credit management and information on the risk of banking operations, even after the Bank of Portugal had taken over the defunct BES and created Novo Banco with only the ‘good’ assets - this was the flawed 'resolution' pushed through by 'Mr Magoo' Carlos Costa, the central bank's governor (pictured).
Novo Banco’s credit policy suffered from "significant deficiencies" under the central bank’s oversight. These findings are "problematic in so far as they point to serious problems in the information technology system and, more importantly, the risk management and reporting capabilities."
This damning assessment is made by the European Commission, far too late to stop the sale of the bank to Lone Star, which it authorised despite the European Commission's Directorate General for Competition warning of significant weaknesses in the bank’s ability to manage default probabilities, loss estimates and even its collateral needs - basic stuff in the heady world of Portuguese banking but beyond the grasp of the Bank of Portugal or Novo Banco's interim management.
The European Commission’s answer is act all concerned while overseeing these problems shifted onto Portugal’s taxpayers as it “considers it necessary to clean up the Novo Banco balance sheet as soon as possible," a position of course shared by the Bank of Portugal as neither have any skin in the game.
This cleaning up operation has already started with predicted Novo Banco losses for 2017 pitched at between €1 billion and €8 billion. The final figure will require an injection of capital by the Resolution Fund, estimated at around €4 billion. This fund, paid into by Portugal's banks, has nowhere near this sort of money lying around, so taxpayers will have to step in – involuntarily – and continue to bail out the American vulture fund which was handed 75% of Novo Banco's shares for €0 and full indemnity should losses mount from the so-called 'good assets.'
These management and banking ‘shortcomings’ were gleaned from the information sent by Novo Banco to Brussels when the sale negotiations were going on - but the sale anyway was authorised by the European Commission in November 2017. The grounds for the decision have only now been released and the documentation has been stripped of confidential information so save any further blushes.
The Commission notes that these shortcomings are not limited to the management during the period prior to the resolution of Banco Espírito Santo’s collapse in 2014, "but they continue to have an impact on the performance of Novo Banco under the management of the Resolution Fund and under the Portugal's central bank. Even new loans granted in 2016, after the Bank of Portugal had been responsible for more than a year, show significant deficiencies in all categories."
Examples of how not to run a bank include:
• lack of cash flow analysis or indication of the customer's repayment capacity in loan files
• credit renegotiation agreements without sufficient protection for the bank
• non-rigorous, incomplete or out-of-date documentation, particularly in loan reviews
• existence of loans granted documentation
• inconsistent assessments of properties given as collateral, which vary according to agencies and regions
• erratic pricing of credit spreads, not adjusted for risk of return, in new loans and restructured loans
• inconsistent or poor credit risk assessment and probability of default
Unsurprisingly, according to Brussels, past lending practices at BES contributed to the collapse of the bank, but also indicates, "that even after the creation of the transition bank – Novo Banco - under the direct control of the Bank of Portugal – little seems to have been done to correct problematic lending practices and risk management standards."
Under the so-called guidance of Carlos Costa, the Bank of Portugal’s governor, and despite having the Resolution Fund as a the State's de facto shareholder, Novo Banco ripped through two presidents - Vítor Bento (July to September 2014) and Stock da Cunha (October 2014 to July 2016) and ended up with António Ramalho (August 2016 to date).
This is a shambles but Europe and the Bank of Portugal care not a toss as the Portuguese taxpayer will continue to bail out a bank that was run by a domineering crook, Ricardo Salgado, under whose byzantine regime the business folded and the vulture fund that mysteriously was selected to own and run Novo Banco, with multi-billion cash offers for the business turned down by Mr Magoo Costa who, like a drunken gambler with someone else’s money, keeps betting on black when all that comes up is red, time after time.
