It could be called the (second) 'longest suicide note in history'* as Carlos Costa, the Governor of the Bank of Portugal, addressed an audience of bankers and regulators at ‘The Present and the Future of Banking’ conference in Lisbon hosted by the Portuguese Banking Association and TVi24.
Costa blamed the banking sector’s woes on their own poor behaviour but failed to appreciate that by doing so he was displaying the Bank of Portugal’s role as financial regulator in the poorest of lights.
Criticising Portugal’s financial sector for supplying “biased or incomplete information,” saying “it is the way to the abyss” will be wholeheartedly endorsed by Portugal’s taxpayers who have been forced time and time again to bail out banks that were operating largely, it seems, without much regulation at all.
Costa went one step further today and asked that the EU exempts Portugal from State aid rules and and allow him to set up a massive ‘bad bank’ be set up to absorb all the bad debt carried by Portugal’s banks, between €20 and €30 billion, without the banks involved having the inconvenience of undergoing a formal resolution policy.
This is a topic that he and Prime Minister António Costa floated a couple of weeks ago to test the public mood.
The Governor of the Bank of Portugal said today that it is important to sanitise banks’ balance sheets as was done with the "northern banks" at the beginning of the crisis. This would remove the effects of the banks own commercial decisions and force the unwitting taxpayer to be lumbered with billions more in largely unrecoiverable debts.
"In 2008/2009, the banks that were exposed to the subprime crisis were banks from countries with excess savings that had invested in the United States. It was not the case in southern Europe," said Costa, adding that the southern banks are now suffering the consequences of the economic crisis of post-2012.
"Here in the Portuguese banks there are assets that do not generate income," he continued, and it is "crucial that banks are able to free themselves of these (toxic) assets."
His pleas were made in front of leaders of the European banking sector including Elke Konin, president of the Single Resolution Council, the European mechanism created to rescue banks that are in a serious condition.
The governor attributed the difficulties of Portugal’s banks on pesky customers defaulting on loans and the "unsustainability of the debt model" to fund construction and public works.
Carlos Costa also believes that it is necessary to adjust the business model of banks, so that they reduce costs and are technologically prepared for a new model of service delivery.
"We have three reasons for capital need: the past in terms of non-productive assets, second there are issues related to deferred taxes and third, the restructuring of the banking sector," says Costa, adding that ‘sanitation process’ of Portugal’s banks was being undertaken in a "gradual" manner and he regretted that the country had not been able to create a 'bad bank' to soak up all the bad debts that banks had accumulated over the past six years, “like what happened in Ireland and Spain.”
The governor then criticised the sector he regulates by pointing out that there is a problem of governance of financial institutions with "insufficient assessment and risk management" and a lack of internal controls and internal and external audit failures, an explnation that the taxpayer will thoroughly endorse.
All in all, many of Portugal’s banks have been allowed to operate as they wished under a Bank of Portugal regulatory regime that puts the soft in ‘soft touch’ and exposes Costa yet again as someone who fails to accept responsibility for his lack of action.
Costa has at least one fan though in the form of Socialist MEP Elisa Ferreira who spoke at the conference, later saying that Costa was managing to steer the Bank of Portugal through choppy seas.
"It is urgent to find a credible solution to the problem of NPL (non-performing loans) said Elisa Ferreira and was all for setting up a ‘bad bank’ to shift the sector’s problems onto the taxpayer.
This is the same Elisa Ferreira that has been appointed to the Board of Directors of the Bank of Portugal.
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"The longest suicide note in history" is an epithet originally used by United Kingdom Labour Party MP Gerald Kaufman to describe his party's 1983 election manifesto, which emphasised socialist policies in a more profound manner than previous such documents.
Comments
The portuguese banks are sitting on more than the "bad bank will ever have" , ie mortgages and loans on the housing gamble , the housing bubble , without harsh offloading now it risks repeating the last 8 years.
The way forward is to force the banks to auction them off to the highest bidder , but politicians are reluctant to do this... they protect those banks assets , socialising the debts instead. Or limit how those assets are sold , ie to a chosen few.
Ireland did exactly that cleanse , and is nearly back on track. Other EU countries that have not are still in the doldrums.