FOUR MAIN Portuguese banks need a capital injection of 2.253 billion euros to keep solvent and ease cash flow problems, it was revealed on Monday.
The banks need the cash to reinforce their T1 Solvency Ratios in order to meet the Bank of Portugal’s legal eight per cent liquidity deposits according to financial analysts.
Although banks borrow and lend far more money than they actually have on deposit in their own vaults, they must under the law have a certain percentage which acts as a security for the day-to-day lending and borrowing risks they are exposed to.
Caixa Geral de Depósitos, which saw 800 million euros wiped off its value in stock market turbulence in September and October, needs a 925 million euro fix to raise Portugal’s largest bank’s safety net deposits from 6.6 per cent to the eight per cent required.
The Bank of Portugal has legally upped the required deposit limits that financial institutions have to have in order to reinforce financial solidity.
But, in turn, this could mean that banks do not pass on the recent European Central Bank interest rate cut to the general public as the cost of their business escalates.
It also means that Portuguese banks will tighten up their criteria as to who gets business, home and personal loans and at what cost as they inevitably pass on the stiff new BdP percentage rates to their customers.
This new eight per cent safe deposit ratio also takes into account capital increases worth 400 million euros ordered by the BdP in August whereby the major banks had to sell assets and issue fresh shares in a bid to raise money to better balance their books.
The BdP has told some banks to reinforce their Tier 1 ratios – the ratio that concentrates capital, non-distributable profits (i.e not shareholder dividends) and preferential shares by September 2009, which must be registered and reflected in their annual reports.
The reason why is simple: Portuguese banks listed on the PSI Lisbon Stock Market lost an average 59 per cent of their value in 2008 because of market turbulence and financial mismanagement in the case of one of two banks.
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