General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
September 15, 2017

IMF publishes its staff report and selected issues report in the context of the 2017 Article IV consultation with Portugal. The staff report highlights that stability and confidence in the Portuguese banking system have improved, following successful efforts to raise capital. However, the IMF Directors cautioned that the large stock of nonperforming loans (NPLs) could limit banks’ ability to finance productive investment.

In the staff report, the staff recommends boosting internal capital generation, removing the impediments to NPL resolution, and addressing the forthcoming regulatory challenges in the form of IFRS 9. There has been a modest decline in the outstanding stock of NPLs since end-2015, supported by the pickup in growth, but they remain elevated at 16.4% of total loans at end-March 2017. This weakness in asset quality remains particularly concentrated in the corporate sector, with corporate NPLs at 29.0% at end-March 2017, compared with 6.7% NPLs on household loans for house purchase and 10.0% for consumer and other loans. The Portuguese authorities emphasized that the long phasing-in of Basel III and the transition period envisaged for IFRS 9 will allow banks to meet their capital requirements smoothly as ongoing cost-cutting efforts will boost banks’ profitability and internal capital generation. Basel III will likely necessitate new equity issuance to offset the reduction in capital ratios, while the setting of Minimum Requirement for Own Funds and Eligible Facilities (MREL) targets will also likely require Portuguese banks—predominantly deposit-funded—to tap wholesale markets to comply with the minimum required level of liabilities that can absorb losses in the event of resolution. Both the Portuguese and European authorities remain cautious about the pace of NPL resolution, warning against NPL fire sales that would destroy bank capital.


The selected issues report examines the challenges (including poor asset quality and weak capital adequacy) facing the banking system in Portugal. A tightening of capital requirements has already begun with the Supervisory Review and Evaluation Process (SREP) conducted by the European authorities on the largest banks in recent years; this tightening would continue with the imposition of a capital conservation buffer and additional systemic capital buffers by the Bank of Portugal. Nevertheless, against the background of stressed asset quality, Portugal has one of the lowest common equity tier 1 (CET1) ratios in the EU—12.6% of risk-weighted assets as of end-March 2017. The macro-prudential toolkit includes requirements for all banks to implement a capital conservation buffer of up to 2.5 percentage points of CET1 and for other systemically important institutions (O-SII) to hold a capital reserve of up to one percentage point of CET1. Given the challenges they are facing, Portuguese banks, as virtually all European banks, have thus been required to hold significant capital above the minimum regulatory level.


In the context of the recovery and resolution planning cycle, banks are expected to adjust their capital and funding structure to the risks inherent in their business models. Pursuant to the Bank Recovery and Resolution Directive (BRRD), banks’ recovery plans are required to ensure that the restoration of banks’ financial conditions, following any significant deterioration, will not have a negative effect on financial markets, other institutions, or funding conditions. To this end, banks must identify the key steps to maintain the proper functioning of their core business lines and critical functions in a situation of financial stress, and thus may have to adjust their business models accordingly. Furthermore, EBA has stressed that the calibration of the MREL target should be closely linked to the bank’s resolution strategy and business models. The impact of these clean-up efforts will be amplified by the move from the current incurred-loss model to the expected credit-loss model, in relation with the implementation of new IFRS 9 provisioning rules, from January 2018. However, the impact of this change will depend not only on the level of existing provisions under IAS 39 and current capital, but also on the method used for calculating regulatory capital. Therefore, the impact will differ for banks using standardized approach and for the few banks using internal models-based approach, or IRB, the latter being already required to deduct any shortfall of loan -oss provisions over regulatory expected losses from their CET1 ratios.


Related Links

Staff Report on Portugal (PDF)

Selected Issues Report on Portugal (PDF)

Keywords: Europe, Portugal, Banking, Article IV, Basel III, IFRS 9, MREL, BRRD, IMF

Related Insights

PRA Delays Final Direction on Reporting of Private Securitizations

PRA and FCA have delayed the issuance of final direction, including the final template, on reporting of private securitizations, from January 15, 2019 to the end of January 2019.

January 15, 2019 WebPage Regulatory News

BCBS Finalizes Market Risk Capital Framework and Work Program for 2019

BCBS published the final framework for market risk capital requirements and its work program for 2019. Also published was an explanatory note to provide a non-technical description of the overall market risk framework, the changes that have been incorporated into in this version of the framework and impact of the framework.

January 14, 2019 WebPage Regulatory News

EBA Single Rulebook Q&A: First Update for January 2019

EBA published answers to 13 questions under the Single Rulebook question and answer (Q&A) updates for this week.

January 11, 2019 WebPage Regulatory News

PRA Proposes to Amend Supervisory Statement on Credit Risk Mitigation

PRA published the consultation paper CP1/19 that is proposing changes to the supervisory statement (SS17/13) on credit risk mitigation.

January 10, 2019 WebPage Regulatory News

FASB Issues Q&A on Estimating Credit Loss Reserves

FASB issued a question-and-answer (Q&A) document that addresses particular issues related to the weighted average remaining maturity (WARM) method for estimating the allowance for credit losses.

January 10, 2019 WebPage Regulatory News

FED Updates Reporting and Supplemental Instructions for Form FR Y-9C

FED published the updated reporting instructions and supplemental instructions for the FR Y-9C reporting form. The reporting frequency for FR Y-9C is quarterly, as of the last calendar day of the quarter.

January 09, 2019 WebPage Regulatory News

PRA Updates Policy on Liquidity Reporting Under FSA047/048 and PRA110

PRA published the policy statement PS1/19 that provides feedback to responses to the consultation paper CP22/18 titled "Liquidity reporting: FSA047 and FSA048" and the proposal in CP16/18, which intended to correct the level of consolidation of the PRA110 reporting requirements.

January 08, 2019 WebPage Regulatory News

FED Proposes to Amend Company-Run Stress Testing Requirements

FED proposed to modify company-run stress testing requirements to conform with the Economic Growth, Regulatory Relief, and Consumer Protection (EGRRCP) Act.

January 08, 2019 WebPage Regulatory News

ESMA RTS on Supervisory Cooperation Under Securitization Regulation

ESMA issued the final regulatory technical standards (RTS) for cooperation between competent authorities and ESAs under the Securitization Regulation (2017/2402).

January 08, 2019 WebPage Regulatory News

ESAs Publish Joint Report on Regulatory Sandboxes and Innovation Hubs

ESAs published a joint report providing a comparative analysis of the innovation facilitators (that is, regulatory sandboxes and innovation hubs) established to date within the EU.

January 07, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2461