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Reinforcing bank capital can’t be done at expense of economy

By Chris Graeme [email protected]

The Bank of Portugal, which supervises the activities of the nation’s banks, has stated that banks which are reinforcing their capital ratios are not doing so at the expense of lending.

Carlos Costa, the governor of the Bank of Portugal (BdP), said that while deleverage was necessary, it was carefully being carried out so as not to harm the actual economy.

Banks have severely curtailed their lending to small and medium sized enterprises in a bid to reduce their loan exposure and beef up their capital ratios in line with European Central Bank guidelines.

That provoked comments from the Portugal’s President Cavaco Silva who, on November 12, stated his fears that “deleverage by the banks was being carried out too fiercely and quickly”.

Cavaco Silva said that it would be “more reasonable for it to be done gradually and hoped that the ‘Troika’ would understand.

The President was speaking in Washington during an official visit to the United States in a bid to drum up business and investment for Portugal in that country where there are many successful immigrants of Portuguese origin.

Cavaco Silva stated that this “deleverage should be done in an adequate proportion so as not to put the financing of the economy at risk”.

However, the former economist stressed that this did not mean renegotiating “in any way” the Financial Assistance Agreement (the €78 billion bailout fund) granted to Portugal by the EU-IMF ‘Troika’.

Over the weekend, the Bank of Portugal issued a press statement which did not directly refer to the President’s comments.

It stated that the bailout programme signed between the Government and the ‘Troika’ imposed a regulation whereby the banks had to comply with Core Tier 1 ratios (solvency) of 9% this year and 10% in 2012.

In other words, banks must have 10% cash liquidity for every 100% lent out to businesses. At the same time, the credit/deposit ratios should not exceed 120%.

The Bank of Portugal added that European banks that were subject to stress tests were also obliged to comply with Core Tier 1 ratios of 9% by June 30, 2012 – a degree of demand that the President has also been critical of.

The new rules forced on European banks was decided at a European summit meeting on October 26 with the aim of creating a “temporary capital cushion” and to beef up the financial solidity of those financial institutions at risk over the uncertainties caused by the European sovereign debt crisis.

But the Bank of Portugal has stressed that the policy of bank capital reinforcement should not harm the flow of credit to the economy since this concern had also been “worked into the implementation of the economic and financial assistance programme (the bailout).